Chapter 32. Macroeconomic Policy Around the World
By the end of this section, you will be able to:
- Analyze GDP per capita as a measure of the diversity of international standards of living
- Identify what classifies a country as low-income, middle-income, or high-income
- Explain how standards of living are influenced by geography, demographics, industry structure, and economic institutions
The national economies that make up the global economy are remarkably diverse. Let us use one key indicator of the standard of living, GDP per capita, to quantify this diversity. You will quickly see that quantifying this diversity is fraught with challenges and limitations. As explained in The Macroeconomic Perspective, we must consider using purchasing power parity or “international dollars” to convert average incomes into comparable units. Purchasing power parity, as formally defined in Exchange Rates and International Capital Flows, takes into account the fact that prices of the same good are different across countries.
The Macroeconomic Perspective explained how to measure GDP, the challenges of using GDP to compare standards of living, and the difficulty of confusing economic size with distribution. In China’s case, for example, China ranks as the second largest global economy, second to only the United States, with Japan being third. But, when we take China’s GDP of $9.2 trillion and divide it by its population of 1.4 billion, then the per capita GDP is only $6,900, which is significantly lower than that of Japan, at $38,500, and that of the United States, at $52,800. Measurement issues aside, it’s worth repeating that the goal, then, is to not only increase GDP, but to strive toward increased GDP per capita to increase overall standards of living for individuals. As we have learned from Economic Growth, this can be achieved at the national level by designing policies that increase worker productivity, deepen capital, and advance technology.
GDP per capita also allows us to rank countries into high-, middle-, or low-income groups. Low-income countries are those with $1,025 per capita GDP per year; middle-income countries have a per capita GDP between $1,025 and $12,475; while high-income countries have over $12,475 per year per capita income. As seen in Table 1 and Figure 1, high-income countries earn 68% of world income, but represent just 12% of the global population. Low-income countries earn 1% of total world income, but represent 18.5% of global population.
|Ranking based on GDP/capita||GDP (in billions)||% of Global GDP||Population||% of Global Population|
|Low income ($1,025 or less)||$612.7||0.8%||848,700,000||11.8%|
|Middle income ($1,025 – $12,475)||$23,930||31.7%||4,970,000,000||69.4%|
|High income (more than $12,475)||$51,090,000,000||67.5%||1,306,000,000||18.8%|
|World Total income||$75,592,941||7,162,119,434|
|Table 1. World Income versus Global Population (Source:http://databank.worldbank.org/data/views/reports/tableview.aspx?isshared=true&ispopular=series&pid=20)|
An overview of the regional averages of GDP per person for developing countries, measured in comparable international dollars as well as population in 2008 (Figure 2), shows that the differences across these regions are stark. As Table 2 shows, nominal GDP per capita in 2012 for the 581.4 million people living in Latin America and the Caribbean region was $9,190, which far exceeds that of South Asia and sub-Saharan Africa. In turn, people in the high-income nations of the world, such as those who live in the European Union nations or North America, have a per capita GDP three to four times that of the people of Latin America. To put things in perspective, North America and the European Union have slightly more than 9% of the world’s population, but they produce and consume close to 70% of the world’s GDP.
|Population (in millions)||GDP Per Capita|
|East Asia and Pacific||2,006||$5,536|
|Latin America and Caribbean||588||$9,536|
|Middle East and North Africa||345.4||$3,456|
|Europe and Central Asia||272.2||$7,118|
|Table 2. Regional Comparisons of Nominal GDP per Capita and Population in 2013 (Source: http://databank.worldbank.org/data/home.aspx)|
Such comparisons between regions are admittedly rough. After all, per capita GDP cannot fully capture the quality of life. Many other factors have a large impact on the standard of living, like health, education, human rights, crime and personal safety, and environmental quality. These measures also reveal very wide differences in the standard of living across the regions of the world. Much of this is correlated with per capita income, but there are exceptions. For example, life expectancy at birth in many low-income regions approximates those who are more affluent. The data also illustrate that nobody can claim to have perfect standards of living. For instance, despite very high income levels, there is still undernourishment in Europe and North America.
Economists know that there are many factors that contribute to your standard of living. People in high-income countries may have very little time due to heavy workloads and may feel disconnected from their community. Lower-income countries may be more community centered, but have little in the way of material wealth. It is hard to measure these characteristics of standard of living. The Organization for Economic Co-Operation and Development has developed the “OECD Better Life Index.” Visit this website to see how countries measure up to your expected standard of living.
The differences in economic statistics and other measures of well-being, substantial though they are, do not fully capture the reasons for the enormous differences between countries. Aside from the neoclassical determinants of growth, four additional determinants are significant in a wide range of statistical studies and are worth mentioning: geography, demography, industrial structure, and institutions.
Geographic and Demographic Differences
Countries have geographic differences: some have extensive coastlines, some are landlocked. Some have large rivers that have been a path of commerce for centuries, or mountains that have been a barrier to trade. Some have deserts, some have rain forests. These differences create different positive and negative opportunities for commerce, health, and the environment.
Countries also have considerable differences in the age distribution of the population. Many high-income nations are approaching a situation by 2020 or so in which the elderly will form a much larger share of the population. Most low-income countries still have a higher proportion of youth and young adults, but by about 2050, the elderly populations in these low-income countries are expected to boom as well. These demographic changes will have considerable impact on the standard of living of the young and the old.
Differences in Industry Structure and Economic Institutions
Countries have differences in industry structure. In the high-income economies of the world, only about 2% of GDP comes from agriculture; the average for the rest of the world is 12%. Countries have strong differences in degree of urbanization.
Countries also have strong differences in economic institutions: some nations have economies that are extremely market-oriented, while other nations have command economies. Some nations are open to international trade, while others use tariffs and import quotas to limit the impact of trade. Some nations are torn by long-standing armed conflicts; other nations are largely at peace. There are differences in political, religious, and social institutions as well.
No nation intentionally aims for a low standard of living, high rates of unemployment and inflation, or an unsustainable trade imbalance. However, nations will differ in their priorities and in the situations in which they find themselves, and so their policy choices can reasonably vary, too. The next modules will discuss how nations around the world, from high income to low income, approach the four macroeconomic goals of economic growth, low unemployment, low inflation, and a sustainable balance of trade.
Key Concepts and Summary
Macroeconomic policy goals for most countries strive toward low levels of unemployment and inflation, as well as stable trade balances. Countries are analyzed based on their GDP per person and ranked as low-, middle-, and high-income countries. Low-income are those earning less than $1,025 (less than 1%) of global income. They currently have 18.5% of the world population. Middle-income countries are those with per capital income of $1,025–$12,475 (31.1% of global income). They have 69.5% of world population. High-income countries are those with per capita income greater than $12,475 (68.3% of global income). They have 12% of the world’s population. Regional comparisons tend to be inaccurate because even countries within those regions tend to differ from each other.
- Using the data provided in Table 3, rank the seven regions of the world according to GDP and then according to GDP per capita.
Population (in millions) GDP Per Capita GDP = Population × Per Capita GDP (in millions) East Asia and Pacific 2,006 $5,536 $10,450,032 South Asia 1,671 $1,482 $2,288,812 Sub-Saharan Africa 936.1 $1,657 $1,287,650 Latin America and Caribbean 588 $9,536 $5,339,390 Middle East and North Africa 345.4 $3,456 $1,541,900 Europe and Central Asia 272.2 $7,118 $1,862,384 Table 3. GDP and Population of Seven Regions of the World
- What are the drawbacks to analyzing the global economy on a regional basis?
- What is the primary way in which economists measure standards of living?
- What are some of the other ways of comparing the standard of living in countries around the world?
- What are the four other factors that determine the economic standard of living around the world?
Critical Thinking Questions
Demography can have important economic effects. The United States has an aging population. Explain one economic benefit and one economic cost of an aging population as well as of a population that is very young.
Prepare a chart that compares India, Spain, and South Africa based on the data you find. Describe the key differences between the countries. Rank these as high-, medium-, and low-income countries, explain what is surprising or expected about this data.
International Labour Organization. “Global Employment Trends for Youth 2013.” http://www.ilo.org/global/research/global-reports/global-employment-trends/youth/2013/lang–en/index.htm
International Monetary Fund. “World Economic and Financial Surveys: World Economic Outlook—Transitions and Tensions.” Last modified October 2013. http://www.imf.org/external/pubs/ft/weo/2013/02/pdf/text.pdf.
Nobelprize.org. “The Prize in Economics 1987 – Press Release.” Nobel Media AB 2013. Last modified October 21, 1987. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1987/press.html.
Redvers, Louise. BBC News Business. “Youth unemployment: The big question and South Africa.” Last modified October 31, 2012. http://www.bbc.co.uk/news/business-20125053.
The World Bank. “The Complete World Development Report Online.” http://www.wdronline.worldbank.org/.
The World Bank. “World DataBank.” http://databank.worldbank.org/data/home.aspx.
Todaro, Michael P., and Stephen C Smith. Economic Development (11thEdition). Boston, MA: Addison-Wesley: Pearson, 2011, chap. 1–2.
Answers to Self-Check Questions
- The answers are shown in the following two tables.
Region GDP (in millions) East Asia $10,450,032 Latin America $5,339,390 South Asia $2,288,812 Europe and Central Asia $1,862,384 Middle East and North Africa $1,541,900 Sub-Saharan Africa $1,287,650 Table 4. Region GDP Per Capita (in millions) East Asia $5,246 Latin America $1,388 South Asia $1,415 Europe and Central Asia $9,190 Middle East and North Africa $4,535 Sub-Saharan Africa $6,847 Table 5.
East Asia appears to be the largest economy on GDP basis, but on a per capita basis it drops to third, after Europe and Central Asia and Sub-Saharan Africa.
- A region can have some of high-income countries and some of the low-income countries. Aggregating per capita real GDP will vary widely across countries within a region, so aggregating data for a region has little meaning. For example, if you were to compare per capital real GDP for the United States, Canada, Haiti, and Honduras, it looks much different than if you looked at the same data for North America as a whole. Thus, regional comparisons are broad-based and may not adequately capture an individual country’s economic attributes.