Fun with GDP statistics

I ran across an interesting illustration of the problems with reporting national economic statistics as they relate to Third World countries, and you all get to suffer the consequences. The same thing can happen in developed countries as well, but this illustration was specific to poor, developing countries. This is taken from Thomas Sowell's, "Basic Economics," specifically a chapter that discusses the concepts of national output and the fallacy of composition, which is an important concept when considering aggregate output and demand.

Here's the initial scenario:
1. A country has a population of 100 million people.
2. The average income distribution by quartile is $1000, $2000, $4000, and $5000, i.e. the bottom fourth of the population makes an average of $1000 per year, then next fourth $2000, etc.
3. This means that 25 million people make an average of $1000 per year, 25 million make $2000, etc. for a per capita income of $3000.

Now perform a little math:
1. Raise everyone's income by 20%, giving the following average incomes:
1st quartile - $1200
2nd quartile - $2400
3rd quartile - $4800
4th quartile - $6000
2. Double the size of the 1st and 2nd quartiles, or classes, as a result of reduced mortality rates among children, the malnourished, and the elderly to 50 million instead of 25 million.
3. When you work out the math, per capita income stays exactly the same at $3000.
4. If you increase the income by anything less than 20%, per capita drops below $3000.

What is so interesting about this exercise is that it shows that a country's population, particularly its lowest classes, can become healthier and increase, income can increase, and yet some economist in Geneva can conclude that they're no better off or, more likely, worse off, than they were before because of the gross statistical methods employed.

You can't trust the economists in government and NGO's to give you an accurate picture of what's going on in the world. Most of those bureaucrats exist for the sole purpose of increasing the size and scope of their bureaucracies. The world is better off today economically in innumerable ways than it was 100 years ago. I'm learning that spewing a few significant-sounding numbers works for political purposes but not in the real world. A bigger picture needs to be considered.

Having said that, here is another illustration of the fallacy of composition, this time as it relates to the U.S. and China.

We hear so much concern over the size of China's economy simply because their GDP is growing so rapidly and is ranked as the 4th highest in the world. Their GDP is still around one-fifth the size of ours, with Germany and Japan still exceeding China's GDP. Having China at number four sounds ominous, but when you look at per capita GDP, China is ranked as the 99th highest behind such economic powerhouses as Angola, El Salvador, and Jamaica. The United States is ranked 5th. I found an article on "China Daily" that talked about how China's per capita GDP was expected to hit $3,000 by 2010, which is 10 years ahead of the schedule set by the Communist Party National Congress (link). Ours is around $45,000 without the help of a bunch of central planners. China has a population four times the size of ours, a GDP one-fifth of ours, and per capita GDP that is around 6% of ours. These are static, snapshot numbers, but they clearly point out that by any measure, China is economically inferior to the U.S. and will remain so for the foreseeable future.

As I've stated before, i believe a good economic system increases a people's standard of living, allowing them to purchase more with less over time, whether that's a better, safer car, a larger, more comfortable home, or a bevy of electronic entertainment gadgets for less than a week's work.. The U.S. is obviously a leader in this area along with places like Japan, Germany, the UK, Australia, etc. Obviously, China is improving, and I would contend that's a good thing. Even if their per capita GDP stagnates, it's entirely possible that the true standard of living for their people is still improving as illustrated above, which is still a good thing. If China ranked near us in per capita GDP as well as total GDP, that might be cause for concern, but they don't, and those people who peddle an economic fear of China do so with cherry-picked numbers, I believe.

In the U.S., we're bombarded by politicians with messages about how wages have declined and the American worker is suffering. You can certainly find numbers to support this idea, but if you consider the benefits that employers provide in lieu of wages (of course they're not free, but they're real, non-taxable compensation) and the purchasing power of an average paycheck, the American worker has never been better off. Naysayers abound, however, and we're bombarded on one side by those who say we're quickly becoming a second-rate economy for any number of reasons, yet also being told by another side that it's just not fair that we have so much while the rest of the world has so little. Fear and guilt in a 24-hour news cycle. Despite the doom and gloom in the press, even among educated economists who try to look smart on television, I think it's entirely probable that the U.S. will continue to be the best place on earth to live for some time and that our prosperity will improve the standard of living of our trading partners.