GDP Growth Per Capita

When giving indication of the economic well-being of the residents of a country, the most commonly used measure is GDP per capita, the national annual production of a particular country divided by the population. There are different ways of calculating GDP per capita, which differ in how they account for the dissonance between exchange rates and relative prices, but it remains a fair tool for comparison. It is not perfect, but GDP is useful for comparing countries' relative wealth. For example, if Eritrea has a GDP per capita (PPP) of about $750 and Italy has a GDP per capita of about $30,000 (IMF, 2007), you cannot really say that Italy is exactly 40 times richer than Eritrea, but you can say that it is much, much richer. Where current uses of GDP do not work very well, however, is in measuring economic growth.

Similarly to GDP, one of the main purposes of calculating GDP growth is to indicate whether the economic condition of the people of a particular country is getting better or worse, and to what extent. Simple GDP growth, the most commonly used measure in these circumstances, is insufficient. That is because it does not take account of a very important factor - population growth. The effect of population growth is significant, not just a splitting of hairs concerning only experts. This point is most clearly made through some simple statistics.

Over the past few years, global population growth has been between 1% and 1.5% annually, ranging from a decrease of nearly 1% in some countries to growth of over 3% in others. Meanwhile, global economic growth has been in the range of 3% to 5%, but with wide variation between countries, some with decreases of approximately 5% to others with increases of over 10%.

To show how problematic inferring change in economic well-being from GDP can be, it is useful to return to the examples of Eritrea and Italy. GDP growth does not account for population growth. These two countries were picked because their GDP growth in 2007 was roughly the same - 2% (CIA World Factbook) - but they have widely divergent population growth rates. Looking strictly at the GDP growth rates, it would appear that the economic well-being of the two countries' inhabitants is improving at the same rate. This is not the case, however, because Eritrea's population is growing at over 3% per year (3.24% - IMF, 2006) and Italy's is roughly static (0.13% - IMF, 2006). Because of this disparity between population and GDP growth, Eritrea's population is actually experiencing a degradation of their economic well-being, whereas Italy's population is experiencing moderate growth (in 2007, that is - currently, Italy is in a recession).

A more accurate measure of change in economic well-being - and that is what is usually desired when GDP growth is given - is GDP growth per capita, which takes into account the distortion rendered by population growth. An estimate of GDP growth per capita can be found simply by subtracting the population growth rate from reported GDP growth rate. What one can find is very enlightening about the economic situation of people all across the world, especially in the long term (over generations). For example, one might wonder why most African countries have remained underdeveloped, in spite of their moderate (if very unstable) GDP growth rates. In purely statistical terms, much of that can be explained by the high rates of population growth found in most African countries. If global economic growth is, on average, about 3% annually, and a particular country has a 3.5% population growth, it must maintain an above-average rate of economic growth simply to keep itself at a steady level of economic well-being. This simple fact is a large part of why economic development usually coincides with declining birth rates.

That is not to say that plain GDP growth should be abandoned; it is a tool with a particular use, and it fits that use. It just has come to be found in uses for which it is not ideal. What GDP growth measures is the change in the size of a country's economy, irrespective of population changes. While it is not wholly appropriate in discussions of quality of life, it is much more appropriate in other parts of economics, when discussing topics such as market size. It is a measure that perhaps is most appropriate in more specialist discussions of economics, where readers already are aware of what GDP growth is and what it isn't.