First, and most importantly, GDP per capita is often touted as a measure of living standards, but that is complete nonsense. GDP per capita is not a measure of quality of life, and claiming that Europe is as poor as Mississippi or West Virginia is simply nonsense. as this video explains in detail.
Besides, the nonsense of confusing GDP per capita with living standards works both ways. Luxembourg has the highest GDP per capita in the IMF database, but if you’ve ever visited Luxembourg, you know it’s so boring that you can’t call what the residents do there ‘alive’.
But even if you want to compare the GDP per capita of different countries as a rough proxy for economic output per person, you’re faced with statistical quirks that most people never pay much attention to.
The figures I quoted at the top are GDP per capita in current US dollars, calculated for all countries using current exchange rates. Well, after ten years, when the trade-weighted US dollar has risen 22%, many will argue that the dollar is quite expensive right now. Thus, comparing U.S. GDP per capita with that of other countries benefits the U.S.
The chart below shows Eurozone GDP per capita versus US GDP per capita at current exchange rates. A number above 100% indicates that the Eurozone’s GDP per capita is higher than that of the US. At the end of 2024, Eurozone GDP per capita was only 54.5% of US GDP per capita, but in 2008, when the euro was strong, it was 86% of US levels. But I seriously doubt that the Eurozone has become 30% poorer over the past seventeen years, or the US 30% richer. In terms of the stock market perhaps, but certainly not in economic output, let alone in ‘standard of living’.
Eurozone GDP per capita versus the US at current exchange rates
Source: Panmure Liberum, World Bank
The usual remedy for these exchange rate fluctuations is to express GDP per capita in constant US dollars, that is, to choose a fixed exchange rate for the entire time series. But this again leaves us open to an arbitrary choice of exchange rate. The World Bank expresses GDP per capita at 2015 exchange rates, but if I use 2005 exchange rates instead, I can artificially inflate Eurozone GDP per capita by about 6%. And if I chose a different date for my exchange rate, I could also shrink the European economy by a few percentage points.
The most accurate figure is usually GDP per capita adjusted for purchasing power parity (PPP), which, as you can see in the chart below, is much higher in the Eurozone because we haven’t had as much inflation as in the US in recent decades, meaning our money goes further when buying goods and services. There’s also a lot of statistical lies in the calculation of PPP, but for the purpose of this article, let’s say that PPP-adjusted GDP comparisons are my preferred metric. And by that measure, the Eurozone’s GDP per capita is 75% of that of the US.
Eurozone GDP per capita versus US, using different methodologies
Source: Panmure Liberum, World Bank
The bottom line is that when it comes to international comparisons of GDP and GDP per capita (and indeed any macro data), you can choose your translation metrics to support whatever story you want to tell. If you want to say that Europe is poor and in decline, choose GDP in the current currency. If you want to tell a story about smaller relative differences, choose PPP-adjusted GDP.
As I said, I generally prefer to use PPP-adjusted GDP because that’s the measure that matters in practice. In everyday life, people and companies do not care how much their income is worth in US dollars or euros, but how much they can buy with the money. And that means that expressing it in local purchasing power is the relevant benchmark.
But PPP is a concept that needs to be explained to the general public, and that means that in today’s world, in the media, you will almost never see a discussion based on PPP-adjusted data, but usually based on current exchange rates. And that is very misleading. Especially when you consider which country has the largest economy in the world, just take a look at the PPP-adjusted GDP graph below.
What is the largest economy in the world?
Source: Panmure Liberum, World Bank
#GDP #capita #lying #advanced #statistics