The Great Depression and World War II, events of unprecedented scale and consequence, were the trigger for economic management. And GDP was born (for those who use it like a prayer, without understanding its meaning and significance, GDP is the market value of all goods and services produced in a country in one year). For about seventy years, it has sovereignly ruled analyses and rankings. Then came the pandemic and an unprecedented throwing of money at people who stayed home and produced – nothing. The war on the EU’s doorstep (and actually global) revealed yet more absurdities (more on that a few lines below). Advocates of ‘degrowth’, various Greta Thunbergs and concerned ‘green’ inhabitants of the planet are increasingly advocating for the end of uninterrupted growth, consequently GDP as well. If anyone truly brings it to an end, it will not be activists, but a typically capitalist group, the World Economic Forum (WEF), which also killed the very precise/mathematical ranking of Doing Business. Instead, it gave birth to BEE, a measure of the environment that enables business (Business Enabling Environment). Why it did this is the subject of various conspiracy theories that we will not address in this text.
Despite the conspiracies, this does not mean that GDP is not full of holes. And this has not been the case since yesterday. Here’s why. For example, Russia was eighth in the world in 2023 according to GDP. Measured by GDP at purchasing power parity (the exchange rate at which the money of one country exchanged in the currency of another country would buy an equal amount of products), it stands even better: first in Europe and fifth in the world! Let’s go further. The poorest U.S. state, Mississippi, measured by GDP per capita, is just about to surpass the largest European economy, Germany! The GDP per capita of the cradle of blues and the state where God said goodnight is officially richer than five of the largest European economies, except Germany. But Mississippi will, as we say ‘GDP’, reach that difference of 1524 euros. This sensational success would imply that immigrants of all colors would rush to Mississippi for a dose of blues. Yet, there is no line for the Mississippi green card; the number of residents there does not change, remaining a tiny 2.9 million for Croatia. So, if GDP is not the trigger for a rush to some destination, what is? Is it time for a new indicator? Is there even a credible substitute?
Just an Approximation
Economist Velimir Šonje explains that GDP is a measure of production that only approximates the standard of living. For this reason, broader measures of living standards have been developed.
– For example, actual individual consumption, AIC. This is a measure of total (real) personal consumption that, in addition to the standard consumption basket used to calculate price indices, includes measures of public goods consumption. There is a comparison for all EU member states. The latest data for 2023 shows that we are at 78 percent of the EU average. Interestingly, Ireland is above the EU average in real GDP per capita, but below it in AIC per capita. AIC is good precisely because it corrects for some anomalies in GDP measurement that appear, for example, in Ireland because investments in research and development by many IT and pharmaceutical companies that have their headquarters there are attributed, but that part of the production of intangible assets does not strongly affect the standard of living of the local population, as seen from this comparison. Besides AIC, there are other, even broader measures, such as the UN’s Human Development Index, which takes into account gross national income, the level of education of the population, and life expectancy. Gross national income is a broader concept than GDP, but related because it takes into account the balance of income flows from labor and capital between the country and abroad in addition to GDP. This is not as important for HDI as the inclusion of education and health during expected life expectancy. According to HDI, we are just behind Poland, Latvia, and Lithuania, and ahead of Qatar, Saudi Arabia, and Portugal, ranking 39th in the world – says Šonje.
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Viktor Viljevac from the Faculty of Economics explains how GDP per capita is used as a measure of living standards because the value of production determines how much money is available for income payments.
Croatia Ahead of Most
– A higher value of production per capita also allows for higher incomes per capita, thus a higher standard of living. Because the price level, or cost of living, varies among countries, prices are generally higher on average in more developed countries, and in international comparisons, GDP per capita is adjusted for these price differences. For example, one thousand euros is worth less in Finland than in Croatia because the average cost of living in Finland is higher, which must be taken into account when comparing living standards. World Bank data shows that, measured by GDP per capita adjusted for differences in price levels, Croatia was ranked 49th in 2023 out of 191 countries for which the World Bank publishes data. Another measure that is often used for international comparisons of living standards is gross national income per capita, adjusted for differences in price levels. Gross national income takes into account that income is generated on Croatian territory that is paid to foreign capital owners. For example, Croatian GDP includes the value of profits generated by companies in foreign ownership (banks, telecoms, retail chains…), which are often paid out in dividends abroad. Since these dividends are not income for Croatian citizens, these amounts are deducted from the value of GDP to calculate gross national income. On the other hand, if a Croatian resident works in Germany and receives a salary there, that amount counts towards Croatian gross national income even though that income was earned in another country. Croatia ranks 46th in the list of 191 countries for which the World Bank publishes data, again leaving behind countries where the majority of the world’s population lives together – explains Viljevac.
