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GDP Growth and Population

03/14/2008

How should we be measuring economic performance?

The latest issue of The Economist magazine contends that “the single best gauge of economic performance is not growth in GDP, but GDP per person, which is a rough guide to average living standards. It tells a completely different story.”

From 2003 to 2007, “America’s average annual real GDP growth of 2.9 percent was much faster than Japan’s 2.1 percent.” But “Japan’s GDP per head increased at an annual rate of 2.1 percent in the five years to 2007, slightly faster than America’s 1.9 percent and much better than Germany’s 1.4 percent. In other words, contrary to the popular pessimism about Japan’s economy, it has actually enjoyed the biggest gain in average income among the big three rich economies.”

Why has Japan’s GDP per head been growing a bit faster than America’s? Simple: “the number of Japanese citizens has been shrinking since 2005,” while the U.S. population continues to grow rapidly.

As The Economist admits, “Americans can quibble over the use of GDP per head, especially with reference to Japan. Firstly, its shrinking population is also an aging one in which the labor force will decline as a share of the population. Unless this is offset by more rapid productivity growth, this could make it harder to maintain the same growth in output per person in future and so harder to pay pension bills. Secondly, slower GDP growth makes it more difficult to reduce the ratio of existing public-sector debt to GDP, which stands at a hefty 180 percent in Japan. Last, but not least, investors care about GDP growth. Corporate profits depend upon the absolute rate of growth of an economy. And companies wanting to invest abroad will favor markets that are expanding more rapidly.”

On the specific issue of population shrinkage, consider Russia. Since 2003, it has “enjoyed annual average growth in GDP per head of 7.4 percent because the population is falling faster than in any other large country (by 0.5 percent a year).” But a plummeting population does not augur well for Russia’s future prospects.

In any case, the whole article is worth reading.

 
AEI