Top 10 Economies by GDP

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When measuring the largest / best economies, there are different ways of ranking countries.

  1. Nominal GDP in $US. This is the simplest measure and shows the actual final market value of GDP produced in the economy. It is useful for comparing levels of international trade. It uses the official exchange rate.
  2. GDP in Purchasing Power Parity (PPP). This takes into account the different costs of living in countries. For example, a country like India will have a higher PPP GDP because although GDP is low, official exchange rates don’t reflect the lower living costs. You can see a comparison here GDP at PPP v GDP in nominal terms
  3. Real GDP per capita. This gives an impression of average incomes in a country. Clearly, the countries with the most people will have high GDP (e.g. India, China). But, GDP per capita will be relatively lower. It can involve Nominal GDP per capita or GDP per capita PPP.
  4. Human Development Index (HDI). The Human Development Index is different to GDP; it tries to take into account living standards by looking at levels of life expectancy, literacy, education, standards of living, and quality of life for countries worldwide.

Top 10 Economies by Nominal GDP

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Economics and Positive Thinking

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If you read any number of self-improvement books, you will come across ideas such as ‘what you think, you will become’. Over, 2,500 years ago, the Buddha said: “All that we are is the result of what we have thought. The mind is everything. What we think we become.”

When overused these positive thinking mantras can become a bit tiresome. But, maybe there is still some relevance to modern macroeconomics.  Not least, we have the phrase of ‘talking ourselves into a recession’. The idea that if key people in the economy keep talking about a recession, this can become a self-fulfilling prophecy. With a threat of recession, people spend less, firms invest less and this creates falling aggregate demand. Cynics may say, people wouldn’t talk about a recession unless there was some economic justification so it will be hard to attribute it all to merely negative talk. Nevertheless, it does show the potential of strong opinions having a significant bearing on the outcome.

If you wish for Austerity, you tend to Get it

The next thing that springs to mind is the recent attitude to the economy and debt. We could characterise the EU and UK’s attitude as ‘austerian’. Generally austerians take a very pessimistic view towards the economy. They are deeply worried about levels of debt and government borrowing. They fear bond markets will very soon penalise these high levels of debt. Austerians spend a lot of time telling the electorate how the economy is in a bad shape and we need to respond with strict spending cuts and tax increases. There is also a sense of morality attached to this austerity approach. ‘Debt got us into this mess, we can’t use debt to get out of it.’

The consequence of austerity measures has generally been higher unemployment and lower economic growth. In the Eurozone, austerity policies have generally failed to reduce debt to GDP ratios because of the recession. Therefore, with budget deficits failing to fall, austerians take this as evidence to cut spending more deeply. Again it is accompanied by a sense of morality. “We almost deserve a period of austerity in response to the previous lending boom of the mid 2000s.” ‘We can’t spend money, we don’t have’. Those of an Austerian nature have an instinctive dislike to the idea of printing money  – even though all evidence of the past five years is that increasing the monetary base has not caused any significant inflation. Perhaps it’s related to the idea ‘we don’t deserve to create money from nothing, but we do deserve a recession.’

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UK Economy in 2013

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Summary of UK Economy at the Start of 2013

The UK economy starts 2013 after one of the longest periods of economic stagnation on record. GDP has been flat for the past two years, and real GDP is still way below the 2008 peak.
growth

Despite the depressing picture of economic growth, unemployment (7.9%) is much lower than might be expected given the sluggish nature of economic growth. However, if we count under-employment (e.g. working fewer hours than would like) and disguised unemployment, then the picture is much less promising.

inflation

Consumer confidence remains low as most people have been affected by the unwelcome combination of high inflation and low wage growth. Inflation fell in 2012, but in 2013, we again may see some unwelcome return of cost-push inflation – prices rising despite the output gap.

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Gun Culture and Market Failure

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  • In 2008-2009, there were 39 fatal injuries from crimes involving firearms in England and Wales.
  • In America, there were 12,000 fatal injuries from crime involving firearms.
  • The population of America is six times bigger than England and Wales.
no guns
Photo David O

There are many who say the solution to gun crime in the US, is to have more guns. A republican Congressman stated, if only school teachers were armed, the Newtown tragedy could have been averted or at least death toll reduced (People who want to arm the teachers). Would you like to teach economics in the US, you will get a free fire-arm and round of ammunition? – no thanks.

In the UK, there is a reluctance to arm even the police – because despite their best intentions, on the rare occasions when guns are used innocent people have sometimes been caught in the crossfire. If the police were armed, people wouldn’t feel safer. Nor is there any compelling evidence they need to be armed.

After, the terrible tragedy in Newtown (and so many others) it is really hard to understand why anyone  would want to support a gun culture where guns and ammunition are so freely available. But, in the US, the days following the massacre  have seen a surge in gun sales.

There is an element of game theory to gun control. The best outcome is for no one to have guns. But, once the gun ownership rate goes up, many feel they have to get one too. There becomes an arms race. Now, there are 90 guns for every 100 Americans, and yet the appetite shows no signs of decreasing. The more guns there are in circulation, the more people feel they need to have one. No one particularly wants to be the first to let go of their arms. Guns are also big business, since 1990 the sale of legal guns alone has averaged about $3.5bn a year.

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Importance of Bank Lending to UK Economy

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Readers Question: What is the importance of bank lending to the UK economy?

Bank lending plays an important role in influencing levels of consumer spending, investment and economic growth.

When bank lending reduced at the start of the credit crunch in 2008 – this decline in bank lending was a significant factor in causing the 2008 recession.

bank-lending-uk
Source: News Release – Quarterly Bulletin 2012 Q4

This graph shows that lending to UK households and business was growing rapidly during the period 2000-2008. However, the credit crunch caused a precipitous fall in the growth of bank lending. Bank lending fell from growth of +10% to negative growth during 2010 and 2011.

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Economic Problems Facing Pakistan

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Readers Question: In this era, Inflation had gotten really high specially in countries like Pakistan. Hows will the Inflation level go down ? or will it even let the country develop ?
Inflation is one of the several problems that the Pakistan economy faces. The good news is that inflation has been falling in the past two years. But, it is still one of the highest in the region; and in addition to inflation, there are also other inter-related problems the Pakistani economy faces.

Pakistan has a forecast of real GDP growth of 3.25% in 2013 – but, given the rise in the population, this growth is insufficient to improve living standards. Real GDP per capita growth has been stagnant in recent years. (real GDP per capita – measures output per person)

 Inflation in Pakistan

Inflation peaked at 20% in 2009 and has now fallen to just under 7% at the end of 2012. However, many expect inflation to increase back up above 10% – because of cost-push factors.

pakistan-inflation

Causes of Inflation in Pakistan include:

  • Rising energy prices.
  • Rising food prices. Agriculture is one of the mainstays of the Pakistan economy with 45% of the labour force employed in agriculture. However, the country has faced food shortages, pushing up food prices.

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How to Measure Success in the Eurozone?

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Earlier in the year, many were speculating the Euro was a risk of breaking up. Up step Mario Draghi with his promise to ‘save the Euro whatever it takes’

Under Mario Draghi, the ECB have done two things to help reassure bond markets:

  1. Long term refinancing for banks – helping to avoid liquidity crisis in banks spilling over into sovereign debt crisis.
  2. Outright monetary transactions – the willingness to buy an unlimited amount of  bonds (in exchange for a country implementing strict fiscal rules)

These policies have helped see bond yield differentials narrow, and there is now more optimism the Euro will survive.

 

bond-yields-oct-12-fr-it

However, it’s curious in the FT article on the Euro crisis FT Person of the year – Mario Draghi , that there is not a single mention of the word ‘unemployment’ or ‘recession’. Just a repetition that Mr Draghi insists austerity can work.

“To give up now, as some suggest, would be tantamount to waste the great sacrifices made by the citizens of Europe,” he says. He also has no time for suggestions that surplus countries such as Germany should inflate away some of their competitive edge. “Inflation is not a policy tool; one does not toy with inflation.”

 It does leave you wondering, how exactly do European policy makers judge success?

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