Understanding Gross Domestic Product
In the last two sections, we looked at GDPs for various economic regions and compared them to one another and to the GDP of the entire world. What we saw is that a few large economies account for a most of the global GDP. Specifically, the European Union, the United States, China, and Japan create almost two thirds of all the goods and services in the world. Why should this be the case?
There two immediate possibilities we can explore. First, it may be that large regions produce more goods and services than smaller areas. Second, it may also be that countries with more people have a higher GDP than countries with less people. Both of these ideas sound reasonable, so let's take a look. To start, we'll consider the actual size of the various countries.
Below, in Figure 3, you can see the GDP for the largest economic regions in the world, as well as for the world as a whole. In this case, our criteria of size is LAND MASS, the total surface area of a country or region, not including water, measured in square kilometers. For the land mass of the entire world, I have excluded Antarctica and Greenland, both of which are mostly covered by ice.
Note: In Figures 3 and 4 below, "Congo" refers to the Democratic Republic of the Congo.
Figure 3: GDP of economic regions ranked by land mass
Without looking at the numbers, we might expect that larger countries would have large GDPs than smaller countries. However, this is not the case.
For example, when you look at the table above, you will notice that Russia is, by far, the largest country in the world: it is about 1.7 times the size of China; 1.8 the size of the U.S.; and almost 3.9 times the size of the European Union. And yet, for such a large country, the Russian gross domestic product is conspicuously low. In fact, although Russia comprises more than 12.3 percent of all the land mass on Earth, it accounts for only 2.8 percent of the world's GDP.
Since Russia is a major world power, it would be interesting to compare its GDP with that of the other three world powers: China, the United States, and the European Union. Before we make such comparisons, however, it would be helpful to have a better way to quantify the relationship of GDP to land mass.
To do so, we can calculate the ratio of GDP to land mass. The units for the result of such a calculation will be in "dollars per square kilometer", which I know sounds strange. However, these ratios will give us an overall measure of how well a particular economy can generate goods and services based on how large it is, which will enable us to compare one economy to another directly.
In the table in Figure 4, I have inserted a column showing this ratio (GDP / Land Mass) for each of the 15 economic regions we looked at above. For reasons that I will discuss in a moment, I have also included Japan (at the end of the table).
To perform the calculation, I divided the GDP by the size of the country or region. I then divided the results by 1,000 to scale them appropriately. Finally, I used this number to rank the various economic regions. The results are below:
Figure 4: GDP of economic regions ranked by GDP/(Land Mass)
The numbers in this table show the ratio of the size of the economy compared to the size of the country. Strictly speaking, the units would be in "$million USD / kilometers squared", although that's not really important. What is important is that there is no direct relationship between the size of a country and the size of it's economy, at least for the very largest countries in the world.
For example, Russia, the largest country in the world, is 1.7 times the size of the next largest country (Canada). And yet, of the 15 different economic regions in our table, Russia has the 4th lowest ratio of GDP to land mass (0.1). Europe, in fact, has the largest ratio (3.9). Comparing these two numbers, you can see that, for its size, Europe's economy is actually 31.7 times the Russia economy.
We can now see, much more clearly, how the 15 regions with the largest land masses compare to one another with respect to GDP. In the last table (Figure 3), Russia was #1 because it is so large. In this table (Figure 4), Russia is only #12. This tells us that, for its size, Russia doesn't produce much GDP, in fact, only a tad more than Algeria and Kazakhstan.
Among the 15 largest economic regions, the real powerhouse, as you can see, is the European Union. Its ratio of GDP to land mass (3.9) is more than twice that of the United States (1.7), and more than four times that of China (0.9). However, as you saw in Figure 3, in terms of land mass, the EU is only the 7th largest economic region in the world. This shows us that there is something more important than size. After all, if size were the most important factor, Russia would be the most productive country in the world, and Algeria and Congo together, would be producing more than the EU, which is hardly the case.
Let's take a look at one more example: Japan. As you can see from the table above, Japan has a very small land mass, only 377,930 km2. Nevertheless, it has a large GDP of $5.964 trillion. Indeed, the ratio of GDP to land mass is 15.8, much higher than any of the other values in the table. Indeed, the ratio of Japan's land mass to its GDP is 4 times that of the European Union, and 9.2 times that of the United States. Clearly, there is a lot more to GDP than simply the size of the economic region.
© All contents Copyright 2017, Harley Hahn