Understanding Gross Domestic Product
If the land masses of various economic regions can't account for differences in GDP, perhaps the determining factor is population. After all, it seems intuitive that the more people who live in a region, the more productive it will be. To see if this is the case, let's take a look at the most populous economic regions in the world and compare their GDPs.
Below, in Figure 5, you can see the GDP for the most populous economic regions in the world, as well as for world as a whole.
Figure 5: GDP of economic regions, ranked by population
The first thing to notice is that China and India are, by far, the most populous countries in the world. Together, they contain over 37 percent of all the people in the world. It fact, China, by itself, contains 20 percent of the world's population.
If GDP were strongly related to population, we would expect these two countries to have the highest GDP which, as you can see, is not the case. Both the European Union and the United States, with far fewer people, have a much higher GDP than China. Moreover, five of these economic regions (EU, U.S., Brazil, Russia, and Japan) have a larger GDP than India, even though they all have far fewer people.
One way to relate the GDP of a region to its population is to calculate the GDP PER CAPITA. To do so, we divide the GDP by the population. You can see the relevant numbers in the table in Figure 6 below, which shows the same regions as the table above, ranked by per capita GDP.
Figure 6: GDP of most populous economic regions, ranked by per capita GDP
Compare the GDP per capita for these 15 economic regions to the average value for entire world, which is $10,160. As you can see, the first five economic regions are above average, with the United States, Japan, and the European Union, being quite a bit higher. Mexico is a bit below the average, while the other nine countries are well below the world average.
This finding is particularly significant for China, which has the largest population on the world, and is one of the four major world powers. (The other three are the United States, the European Union, and Russia.) Even though China's GDP is the third-highest in the world, its GDP per capita is surprisingly low, being significantly less than Brazil and Mexico. Why is this the case?
Economists use "GDP per capita" values because it is a convenient way to compare different economic regions while accounting for differences in population. However, when we calculate such values, we are imposing an artificial assumption that is only partially valid. Here is why.
The term per capita means "per person". However, we can't take it literally. For example, it would be tempting to say, based on the table above that, in the United States, the average contribution of a person to the GDP is $49,614; where in China, the average contribution, per person, is only $6,092. To understand why such observations are invalid, we must go back to our original definition of GDP:
"The gross domestic product is an estimate of the monetary value of everything produced within a specific part of the world during a certain time period."
What I want you to notice is that there is nothing in this definition that specifically mentions people. To be sure, within any economic region, some of the goods and services are produced by the people who live there. However, as we discussed earlier, a much larger portion of the GDP is actually produced by companies, governments, and other organizations. That is why per capita estimates can be so misleading. Although the United States has far fewer people than China, U.S. companies create far more goods and services than do Indian companies.
© All contents Copyright 2017, Harley Hahn