More lecture notes: GDP, the rule of law and education

Does GDP measure wealth?

Wealth of consists of (1) natural resources (land, timber, minerals), (2) produced resources (goods and services), and (3) intangible assets. Two key components of intangible wealth are the rule of law and education. The rule of law provides people with the confidence and security to work, trade, and borrow; it reduces risk, uncertainty and the level of indiscriminate injustice and increases chances tosurvive. Education allows a society to grow, improve and innovate, to thrive.

A 2007 World Bank report noted that intangible per capita wealth in high-income countries ($353,339) greatly exceeded intangible wealth in low-income countries ($4,434) and that less than half a country’s wealth derives from natural or produced wealth. For richer countries, intangible wealth represents 80% of the wealth.

Tangible wealth can help generate intangible wealth. And intangible wealth, in turn, helps create tangible wealth. Without intangible wealth, tangible wealth is difficult to produce. But tangible wealth is not a guarantee of the creation of intangible or produced wealth. The leading economies all have wealth per capita greater than $450,000. By total wealth per capita, Austria, Belgium, Denmark, France, Germany, Japan, Norway, Sweden, Switzerland, and the United States are the wealthiest countries. Eight of the ten wealthiest are European. India (< $10k per capita), China (< $10k) and Russia (< $40k), with almost half of the world’s population, have less than ten percent of the wealth per capita of the wealthiest countries. The poorest ten are primarily African. See this World Bank 2018 report on "the changing wealth of nations.

A more comprehensive typology of wealth

Hamilton and Hepburn define described six sub-components of wealth with overall wealth defined as the net present value of future income. The wealth of a nation can be partitioned into forms of capital, which include:

· physical or produced capital, including physical infrastructure, buildings, machinery

· human capital, the education and stock of knowledge embodied in human beings

· natural capital, or minerals, fossil fuels, commercial and natural land, fish stocks

· intellectual property, includes the value of contracts, leases, patents, software

· social/institutional capital includes intangible factors the quality of institutions, the rule of law, and various forms of social capital that enable goods and services to be produced

· net financial assets, the measure of the net holdings of financial assets across national borders

This is a delineation of the multiple forms of wealth that people value. We will often use ‘value,’ ‘wealth,’ and ‘capital’ somewhat interchangeably, as each refers to things of importance.

This table shows world GDP per capita growing from $5,400 in 1990 to $17,574 by 2019 (before declining slightly in pandemic era 2020), as measured in current international dollars. (See also). The United States is the only country that places in the top twenty in total GDP and GDP per capita. Population is not the primary driver of economic activity; productive human capital is the driver. A similar table shows world GDP, as measured in current US dollars, increased in the same period from $1.35 trillion in 1960 to $87.57 trillion in 2019 (only to drop to $84.75 trillion in pandemic-policy 2020).

A related measure, the number of millionaires per country, offers a different perspective on the measure of a country’s wealth. “Just four countries are home to over 60% of the world's High Net Worth Individuals, or HNWI, according to the World Wealth Report (2016). The list of countries with the most millionaires starts with the United States (with 4,458,000), followed by Japan, Germany, China, the United Kingdom, France, Switzerland, Canada, Australia and Italy (with 229,000). See pre-pandemic per capita income by country (or teritory) here (see table, below). Note that the United States is the only country with a population of more than 100 million to appear on the list.

See also this 2018 article, An alternative measure to GDP is proof that the global economy isn’t what it seems. See also this second 2018 claim from Quartz, GDP is sexist.