Sunday, January 5, 2014

Where is all the Money?

I just looked up (again) per capita GDP in various countries.  This is  well-known stuff. Everyone knows that most of the rich countries are in Europe and North America, and that the  poorest countries are  in Africa. I don’t want to retread this familiar ground.

I want to show you the fallacy of measuring national well-being through this indicator - per capita GDP. First, here is a table that ranks some of the world’s 197 countries by mean/average per capita annual GDP

countries: Total: 197
1. Qatar
Middle East city state
2-7: Liechtenstein, Luxembourg, Monaco, Singapore, Norway, Brunei
City-states in Europe and  Asia
8. U.S.
North America
9. Switzerland
10. Australia
South Pacific
12. Canada
North America
14. Netherlands
21. Germany
26. U.K.
27. Japan
28. France
29. European Union
31. South Korea
35. Italy
53. Hungary
55. Russia
70. Mexico
Latin America
81. World

84. Brazil
Latin America
87. South Africa
100. China
141. India
168. North Korea
197. Congo, Dem. Rep.

But as I started out saying, per capita GDP is a pretty meaningless measure, and I will explain why. First, a few definitions:

1. GDP  means Gross Domestic Product. It is the TOTAL amount of wealth produced (and consumed)  by a country in a year. For example, America produces about $16 trillion of wealth in one year. It is true that in many   countries total production and consumption are not equal. But let’s not get bogged down. The world as a whole, of course,  produces and consumes exactly the same amount.

2. “Per capita  GDP  is the  mean, or  average: “Mean, ” per capita” and  “average” are synonymous: America’s per capita (or mean) GDP is the country’s TOTAL GDP ($16 trillion)  divided by  the population (316 million). As the table shows, that figure is currently nearly $51,000.

3. The mean is a “measure of central tendency.” Another  measure of central tendency is the Median: This measure refers to the middle  value in a frequency distribution. Half the population is above it, and half is below.  158 million Americans make more  than the  median, and 158 million make less. This figure happens to be about $29,000.

When it comes to income, the median is a better measure of central tendency than the mean. The reason that Americans’ average GDP is $51,000 while their median GDP is only $29,000 is that such distributions  are  skewed: There are many more poor people than rich people.

Take for example a class of 100 college students. Their mean/average is $25K and a distribution of all individual  incomes  reveals that the median is also roughly  $25K. Now add ONE millionaire to this class (the professor, haha): the class’ total income goes up to $3.5 million. Dividing this by 101 yields an average/mean  of $34,653, which is $9,653 higher than it would be if the millionaire hadn’t joined the class! On the other hand, what has happened to the median? Since there is only one more person  in the class, you still have to draw the line which separates the top 50 from the bottom 50 incomes, and that line is still pretty much at $25K, or just a little bit above. So now, the mean/average is more than nine and a half thousand dollars higher than the median.

And that’s how it is with the national income and GDP:  Because of the staggering incomes of a relatively few  1%-ers, the total  and the average look a lot rosier than the  median.

Incidentally, the fact that the U.S. ranks 8th in the world in  mean GDP  but 4th in median GDP is nice: it suggests that  inequality, while pretty bad already and still deteriorating,  is not as bad here as it is in many other places. 

Furthermore, what really matters is not individual GDP , but   household  income.

There are about 120 million households in the U.S. (average size about 2.6 individuals). So average household GDP is $133,000. Wow! This is high, don’t you think? 

We just saw that median individual  GDP was only 57% of mean GDP, so let’s say that median household is likewise 57% of mean household, i.e. $76,000. Still quite a sum! And keep in mind that many families are larger than 2.6 people.  My own immediate family of procreation had four  people, and many of my married friends have, likewise, a couple of kids. Presumably, the GDP of families of four is even higher.

It clearly doesn’t make sense to equate GDP with income. Do most families of four that you know make $204,000 per year (the mean) , or even $116,000 (the median)?

So I keep returning to my question: Where is that $16 trillion GDP? Dividing $16 trillion by 316 million people to see how most Americans are doing is nonsense. A lot of the wealth – that statistical $51,000 which every American adult, infant baby and retiree is supposed to enjoy -   is somewhere else.

For one thing, there are those 1%-ers who live in the stratosphere, whom  we never meet, whom we only know  via the media. Part of the $16 trillion GDP are the vast stock market profits reaped by Wall Street paper shufflers and their investing clients.

And then there is the government: the federal budget alone is  $3.6 trillion. Multiply this by two  for all government  spending, and you get $7.2 trillion, or nearly half the  GDP. I don’t know how much of this ends up as public assistance and discretionary consumer spending by  the people. Let’s say half. The other  half is spent on stuff  like aircraft carriers, wars, foreign aid, and also on very important  things  such as education, healthcare and infrastructure, positive programs to be sure, but outside the people’s consumer market.

The amazing realization is that most people around  me – retired or still working professionals, people who take  cruises and travel to Europe, people who own pretty nice suburban homes, people with advanced degrees  -are probably around the statistical median, or the mean at best. But there are far more people  who can barely make ends meet. Which indicates that there must also be  obscenely wealthy people around. But we rarely see them. leave comment here

© Tom Kando 2013