Topic 2: Why do we care about
GDP?
PRINCIPLES OF
MACROECONOMICS
Dr. Fidel Gonzalez
Department of Economics and Intl. Business
Sam Houston State University
Why is GDP important?
During this semester we will be talking about GDP almost any class. If we are going
to pay so much attention to GDP we may need to know why GDP is important.
First, we need to derive a new concept: GDP per capita or GDP per person.
GDP per capita: usually when we want to compare the living standard in a country
we do not use just GDP but rather GDP per capita. The reason is that sometimes
the GDP in two countries can be different just because one country has higher
population.
For example, the GDP of India is the equivalent to $1.5 trillion USD whereas
Mexico’s GDP is $1 trillion USD. That is, India’s production is 50% higher than
Mexico’s.
Does that mean that India has a similar standard of living than Mexico?
Well not necessarily, an important difference between Mexico and India is
population.
India has 1,210 million people while Mexico has only 112 million.
Therefore, we need to account for the fact that countries have different population
sizes.
GDP per capita
We do this by computing the GDP per capita:
GDP per capita = GDP/population
Hence, from our previous example we obtain that the GDP per capita in India and
Mexico may be different because the GDP per capita are very different:
India GDP per capita: $1.5 trillion/1,210 million = $1,239.7
Mexico GDP per capita: $1 trillion/112 = $8,928.6
The GDP of Mexico is about $8,928.6 USD whereas for India is $1,027. Therefore,
despite India having a higher GDP when we look at the GDP per capita we observe
that Mexico has a higher standard of living that India.
Now, consider Australia. The GDP of Australia is $1.2 trillion USD. This is somewhat
similar to Mexico.
Does that mean that Australia and Mexico have a similar standard of living?
Well, to answer that questions we need to look at the GDP per capita. Australia’s
population is 23 million:
Australia GDP per capita: $1.2 trillion/23 million = $52,173.9
GDP per capita
Since the GDP per capita is much higher in Australia we can say that the standard
of living is higher in Australia than in Mexico.
Thus, remember that to compare standard of living across countries we need
to look at GDP per capita.
What about the US?
The GDP in the U.S. in 2010 was $14.6 trillion and the population was 312 million
GDP per capita U.S. = 14.6 trillion/312 million = $46, 795
This means that if income was divided equally among all the people that live in the
US each person will get around $46,795.
Why is GDP per capita important?
From previous lectures remember that GDP is a measure of the production and
income for a region or country.
Why do we care about GDP?
Because income per person (measured as GDP per capita) is positively related with
the standard of living in a region. In general, the higher the GDP per person the
better off people are.
But we have learned from the movies that money is usually bad and it cannot buy
happiness. Well, the answer to that a little bit ambiguous. As I will show you in the
next slides, increases in income are important when you have low or middle income
but not so important when you are very rich.
The next slide shows the relationship between life expectancy at birth and GDP per
capita.
Life expectancy at birth is the amount of years a person born in that year is
expected to live. This is a good indicator of development of living standard. Usually,
people with high living standard live more years because they can afford education,
health care, have access to basic sanitation like clean running water, sewage
system and so on.
Life Expectancy at Birth and GDP per person 2008
40
50
60
70
80
Life Expectancy at Birth and GDP per person 2008
4
6
8
log of GDP per capita
10
12
Why is GDP important?
The previous slide shows that there is clear positive relationship between life
expectancy and GDP per capita.
We can divide the previous graphs in two sections. In section I, we have a very
positive relationship. When GDP per capita increases Life Expectancy at Birth also
increases and by a large amount. This is true for countries that are in the left of the
graph. That is, for countries with low incomes, increasing income per person
(measured as GDP per capita) produces important
In the section II of the graph we can see that increases in GDP per person do not
produce that much of a change in life expectancy at birth. That is, for rich countries
changes in income per capita are not that important because they are already rich
(Think about how much an extra million dollars will affect Bill Gates, not much.
However, think how that million dollars will affect the typical US family, a lot).
I like to call these two sections as follows:
Section I, I call it the “HBO documentary” where people are poor or middle income
so more money affects people’s life in a significant way.
Section II, I call it the “Disney movie” where money does not make you better off by
much.
70
80
Life Expectancy at Birth and GDP per person 2008
50
60
Section II:
Disney Movie
40
Life expectancy at birth (years) both sexes
Life Expectancy at Birth and GDP per person 2008 (1/2)
4
6
8
log of GDP per capita
10
12
The graph above show the two section I mentioned in the previous slide.
Why is GDP important?
But what about well-being? What if we consider other things like housing, crime,
jobs and other things? Are things different then?
The next slide shows the relationship between income (measured as GDP per
capita) and a well-being index.
The well being index includes: housing, income, jobs, community, education,
environment, governance, health, life satisfaction, safety and work-life balance.
This data comes from the Organization for Economic Cooperation and Development
(OECD). The OECD is an international organization that includes the richest
countries in the world. So, the data do not include information for poor countries.
The graph is very clear, for most countries there is a positive relationship between
income and well-being.
Again, there are some exception for the very rich countries where more money does
not necessarily mean better well-being, but this is mostly for the very very rich.
Well-being and GDP per person 2009 (selected countries)
Why is GDP important?
But what about happiness? May be people live less but happier in place with low
income per person.
The next slide shows the relationship between income (measured as GDP per
capita) and happiness. Happiness is measured as an index where people from
different countries stated how happy they feel with the lives.
You can see in that graph that as income per person increases, in general there are
happiness also increases. Of course, it is not true across all countries.
Some countries are relatively poor but very happy.
For example, Mexico and Colombia are two countries where people are much
happier than countries with similar income per person. In fact, according to the
graph Colombian people are one of the happiest people in the world.
Also, people in Russia are unhappy compared to countries with similar levels of
income per person.
So, it is not a perfect correlation but we can say that in general higher income per
capita leads to higher happiness.
Happiness and GDP per person 2003
H a p p in e s s an d G D P p e r p e rso n 2 0 0 3
D e n ma rk
S wit ze rlan d
8
C o lo m bia
Au st riaIc ela n d
A u stra
Fin
Sliala
w ende
d n
Ir elaNnodrw a y
N e t he rla n ds
N e w Ze a lanU
d nit ed St at e s
B e lg ium
G e rm a n y
M e xico
El Sa lva d o r
Arg
BVraeenzilnt
ezu
inae la
C h ile
In d o ne s ia
N ig e ria
6
In d ia
Sp a in
G re e ce
C h in a
P e ru
B an g la de sh
I srae l
P o lan d
B o livia
H u n g ary
M oro cco
P o rt u ga l
Ko re a
S ou t h Afr ica
TuLrke
eb ya n on
5
K en ya
G h a na
R us sia
4
B ulg a ria
Zim b ab w e
3
H ap pi n e s I nd e x
7
H o n du ra s
6
7
8
Log o f G DP
9
10
11
Why is GDP important?
Ok, so we know that GDP, specially GDP per capita is important.
The next questions would be: how different is GDP per capita across countries?
The following two graphs, show that GDP per capita actually differs substantially
between countries. This makes Macroeconomics an important matter.
0
Luxembourg
Switzerland
Ireland
USA
Australia
France
Canada
UK
Spain
New Zealand
Portugal
Korea
Latvia
Poland
Libya
Russia
Mexico
Panama
Costa Rica
South Africa
Peru
Thailand
China
Ecuador
Guatemala
Ukraine
Egypt
Iraq
Bhutan
Bolivia
Cameroon
Nicaragua
Yemen
Senegal
Pakistan
Cambodia
Chad
Lesotho
Burkina Faso
Bangladesh
Tanzania
Mozambique
Nepal
Madagascar
Niger
Malawi
GDP per Capita (USD)
GDP per person in US Dollars for selected countries 2010 (1/3)
120,000
100,000
80,000
60,000
40,000
20,000
0
Luxembourg
Norway
Switzerland
Qatar
Denmark
U.A.E.
Ireland
Netherlands
USA
Austria
Australia
Finland
Belgium
Sweden
France
Germany
Canada
Japan
Iceland
Singapore
UK
Italy
Spain
Kuwait
Cyprus
Greece
New Zealand
Israel
Slovenia
Portugal
The Bahamas
Malta
Bahrain
Czech
Korea
Slovak
Saudi Arabia
GDP per capita (USD)
GDP per person in USD for selected countries 2010 (2/3)
120,000
100,000
80,000
60,000
40,000
20,000
Iran
0
Liberia
Malawi
Sierra Leone
Niger
Ethiopia
Madagascar
Afghanistan
Nepal
Zimbabwe
Mozambique
Uganda
Tanzania
Rwanda
Bangladesh
Gambia
Burkina Faso
Haiti
Lesotho
Mali
Chad
Kenya
Cambodia
Mauritania
Pakistan
Zambia
Senegal
India
Yemen
Vietnam
Nicaragua
Nigeria
Cameroon
Ghana
Bolivia
Philippines
Bhutan
Honduras
Iraq
Indonesia
Egypt
Republic
Ukraine
Syria
Guatemala
Turkmenistan
Ecuador
El Salvador
China
Belize
Thailand
GDP per capita (USD)
GDP per person in USD for selected countries 2010 (3/3)
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
Why is GDP important?
SUMMARY: Lets provide a summary of main findings in this set of slides.
1)  GDP per capita is a measure of income per person and it is a measure of living
standard in a country.
2)  In general, GDP per capita is positively related with living standard.
3)  In general, GDP per capita is positively related with life expectancy at birth (a
measure of living standard).
4)  For poor and middle income countries GDP per capita and life expectancy are
stronger positively related.
5)  For rich countries GDP per capita and life expectancy are positively related but
this relationship is not very strong particularly for the very very rich countries.
6)  In general GDP per capita is positively related with happiness. However, there
are countries where things are different.
7)  GDP per capita varies widely across countries.