While reading the latest Voxeu article by Lucrezia Reichlin and coauthors, “The Eurozone has been infected by the US slowdown“, one of the graphs in the article made me reflect – again – on the dominance of Gross Domestic Product in discussions on the state of an economy.
Most of the time commentators refer to the total GDP, whereas GDP per capita is very often ignored or, even worse, implicitly considered a synonym of the other term. In the graph below, Reichlin and coauthors aim at showing the level of correlation in business cycles between the US and the Euro area.
My intention here is to convince you that the graph should not be interpreted as a divergence in living standards across the two sides of the Atlantic (again, that’s not what Reichlin et al. claim). Ah, the ill-fated creation of the currency union! I already feel someone is having this though right now. As the picture below shows, using a comparable measure of per capita GDP – unfortunately only available for a short time series – we do not observe a dramatic divergence in the growth rate of GDP per capita in the last 25 years. The first graph was indeed showing a divergence.
Where is most of the divergence in total GDP coming from? Population trends, as you can see below. Both statistics are important: the larger is the economy, the larger are markets for European firms and this is beneficial for their growth. Also in terms of diplomatic relationships, power increases with the size of the economy. On the other hand GDP per capita is much more suitable to measure the living standard of the average individual in a country. Lets keep it in mind next time we discuss GDP data.