Monday, October 21, 2019

Thinking about metrics comparing countries for both average living standards and equality of living standards.

A healthy debate is happening about whether the standard measure of national economic well-being--per capita GDP--is sufficient for that purpose.  One problem is that per capita GDP does nothing to take into account how broadly affluence is enjoyed.  If, to give an extreme example, a country of 1000 people had GDP of $1 billion (let's call it Witallia), its per capita GDP would be $1 million, which sounds great.  But if the country has one person who makes $1 billion and the remainder make nothing, it is not doing very well.

The standard measure of inequality is the GINI coefficient.  If a country has a GINI of 0, it means everyone makes exactly the same amount of money; if it has a GINI of 1, it is like Witallia. 

Clearly, no country is either, but the range of GINIs is large.  The GINI for Norway is 27, while in the US it is 41.   Norway in a sense dominates the US, in that it has both higher per capita GDP ($75,000) than the US ($62,000) and a lower GINI.  So it is easy to compare countries when one comes out ahead in both measures.

But often one country will have a higher per capita GDP and higher GINI than another.  A metric that seeks to compare countries in both dimensions needs to combine both into a single number.  A straightforward example would be to simply divide a measure of national income by GINI.  I did this using 2015 World Bank Data on PPP Per Capita Gross National Income and GINI (this is the most recent year with reasonably complete sets of both.  When one does this, the top countries for GNI/GINI are

1. Norway
2. Luxembourg
3. Switzerland
4. Denmark
5. Sweden
6. Ireland
7. Austria
8. Belgium
9. Finland
10. Germany

The US clocks in at number 11.  One could make a case that among large economies, it is number 2. 

This list looks reasonable to me, but that doesn't mean this measure is correct--anything that attempts to combine the two will be somewhat arbitrary.  One could try things like GDP/(GINI^1/2), for example.  (BTW, if someone has already done the exercise above, my apologies for not citing--I looked around the web for a while and couldn't find one).