household consumption
3. Comparison of levels of variables: GDP per head in volume
in the euro area and in the United States according to the “standard” definition in the national accounts. The result is a European saving ratio that is systematically greater, by around seven percentage points, than that of the United States. The dotted line shows the results using an alternative definition of the saving ratio in which the capitalisation systems (used in the United States) are treated as being pay-as-you-go systems. It can be seen that the difference vis-à-vis the United States is even larger than with the standard definition, amounting to almost 12 points near the beginning of the period to 10 at the end.
The conclusion to be drawn from the chart is that saving behaviour is even more different between the countries of the euro area and the United States than previously thought. The OECD has carried out other calculations of the same type to explain this wide difference in saving behaviour. For example, studies were carried out to see whether differences in the definition of consumption, in the respective shares of direct and indirect taxes or in the degrees of possession of durable goods could be explanations. So far, all these calculations have tended to confirm that there is indeed a fundamental difference in behaviour and not a statistical aberration. This is a reassuring conclusion in a way, but it illustrates the fact that in making international comparisons it is necessary to examine all possibilities of statistical non-comparability before drawing conclusions.
3. Comparison of levels of variables: GDP per head in volume
The Figure 2 below is very simple but telling. It shows the evolution in the volume levels of GDP per head for Japan, the euro area and the United Kingdom relative to the United
Figure 1. Household saving rates
Difference Euro zone – USA
StatLink: http://dx.doi.org/10.1787/251601023511 14.0
99 2000 01
1991 92 93 94 95 96 97 98
12.0 10.0 8.0 6.0 4.0 2.0 0
Standard definition Alternative definiton
in volume
States, which has been set to equal 100. The chart shows that GDP per capita in Japan and the euro area, as well as the UK, is between 70% to 80% of GDP per capita in the USA. It also reveals that around 1980 the relative levels of GDP per head for Japan, the euro area and the UK were roughly equal at 72.5% of the United States level. What happened in the 25 following years?
Between 1980 and 1994, Japan's economic growth was much faster than that of the United States, and, as a consequence, its GDP per head tended to approach that of the United States. However, its relative level peaked in 1991, at roughly 85%. From then on, Japan suffered a period of severe “deflation” (economic stagnation and falling prices) and lost in 10 years what it had gained vis-à-vis the United States in the previous 10. Therefore, between 1980 and 2003 Japan gained only 2.5 percentage points in relation to the United States.
Prior to 1980, the euro area had also shown some relative growth compared with the United States, and this had raised hopes of convergence at some point. But the euro area also started to stagnate by comparison between 1980 and 1994 and then to show a relative decline. In relation to the United States, the euro area’s level of GDP per head for 2003 was 2.5 percentage points below what it had been in 1980. This was caused mainly by the large continental countries (Germany, France, and Italy) and not the smaller ones. Results for the United Kingdom, which is not part of the euro area, shows that this dismal picture is not true of all European countries. On the contrary, the United Kingdom, which had shown a relative decline in the 1970s, rebounded strongly in the early 1980s and has gained 2.5 percentage points in relative terms over the past 25 years.
Figure 2. Real GDP per head relative to the United States
Indices, based on 2000 PPPs and 2000 prices (USA = 100)
Source: OECD (2006), National Accounts of OECD Countries, Main Aggregates, 1970-2004, 2006 Edition, OECD, Paris.
StatLink: http://dx.doi.org/10.1787/888324203845 90
94 2000 03
1970 73 76 79 82 85 88 91
85 80 75 70
65 98
Japan United KingdomEuro area
in volume
3
The above chart gives a striking picture of the evolution in the relative economic situations of the euro area, Japan and the UK. The OECD has concluded that the convergence of GDP per head between the United States and other OECD countries, which had been a feature of the postwar period, has come to a halt. It has therefore been sounding the alarm that large-scale structural reforms are needed in the leading European countries
Box 3. GDP and the measurement of welfare*
Criticisms are often voiced concerning the shortcomings of GDP per head as a measure of welfare, as more or less implied by international comparisons of GDP per head. In a way, these criticisms are justified. GDP per head is not a measure of economic and social “welfare”. It is not even a measure of wealth. It is merely an overall measure of the production of goods and services.
However, it should not be forgotten that this production is itself an important dimension of welfare.
We are all consumers of goods and services, and we are all glad to have more of both. Strong GDP growth also goes along with a decline in unemployment. However, it is indisputable that there are dimensions of welfare that are not reflected in GDP, such as choice of leisure activities, social inequality, security of goods and persons, and quality of the environment. It is therefore reasonable to raise probing questions as to how best to guide economic development so that it serves human development and welfare.
How can these alternative factors be considered? Official statisticians (in national statistical offices) are inclined to tell users that instead of trying to say everything via a single indicator, such as GDP, they might consider using a set of indicators that enable them to make inter-country comparisons for some or all these factors, with GDP merely one of the indicators. This is in fact what the OECD does.
However, some economists (mainly in universities) advocate the construction of a single indicator, a sort of super-GDP, covering not only the production of goods and services but also social and environmental factors. This indicator, for example, would show a decline given deterioration in the environment, an increase in violence or a widening of socio-economic inequalities. It would then be a simple matter to rank countries according to their success at all these levels. Some organisations have created an index of this type, an example being the United Nations' “human development index”, which has three components: standard of living, level of education and health standard.
Many economists have also proposed indicators of this kind.
But the problem with a “super-GDP” indicator is that it is not clear how to combine social and environmental dimensions with the production of goods and services. In other words, what “prices”
can be used to weight the environment or social inequalities, in relation to the production of milk or machinery? The weights being proposed remain fairly arbitrary, and this diminishes the credibility of such indices. In fact, it can be shown that varying the weights for the hard-to-quantify factors leads to a substantial change in country rankings. Therefore, until a genuine consensus is reached regarding the method of calculation, there is little chance that a super-GDP index will be calculated by official statisticians.
* Readers interested in alternative measures of well-being should read the recent OECD Economics Department Working Paper:
Alternative Measures of Well-Being, http://dx.doi.org/10.1787/832614168015.
purchasing power parities
and in Japan in order to prevent further widening of the gulf between a thriving United States economy and lagging economies elsewhere in the OECD. This conclusion may be open to discussion (see Box 3, “GDP and the measurement of welfare”), but it is based on data that cannot be ignored.
In purely statistical terms, Figure 2 is an ingenious comparison of absolute levels of GDP per head in certain countries with that of the United States, as well as a comparison of growth rates in GDP per head over time. It is important to understand that what is being compared here is volumes of GDP per head, and not monetary values of GDP per head. To compare GDP in volume for countries with different currencies – and different purchasing power for those currencies – it is necessary to calculate a spatial volume/price breakdown using a method known as “purchasing power parities” (PPP).