Growth Rate Of The GDP Per Capita Revisited: What Is Real GDP And Real GDP Per Capita? Nobody Knows

We have presented dozens of real GDP per capita graphs using the Maddison Project Database in the previous posts. We fully trust the professionalism of the MPD team and their GDPpc estimates. They use raw data, however, which might be biased overall and specifically for our study. First of all, when we say "per capita" or "per head" what do we mean specifically - the total population, working-age population, or the population in the labor force? The main question is: Who is driving the real economy? When modeling real economic growth in mainstream economics, the GDP per capita is using the working-age population (not the values published in the MPD). There are several reasons for this approach. Two of them are: 1) children do not work and do not produce goods and services; 2) Children do not have income; at least their incomes are not determined in the annual Current Population Surveys and decennial censuses. 

The importance of the difference between the total and working-age population is illustrated in Figure 1 with the USA and Mexico as examples. Mexico had a larger portion of children between 1960 and 1980 and then the USA took the lead. It is not excluded that the growth in the portion of Hispanic and Latino Americans due to migration to the USA assisted the elevated birth rate. The correction for the difference between the total and working-age population is an interesting option to be exercised in any case. One could expect that the overall data consistency has to be improved. On the other hand, there are countries with official and non-official migration. The share of such people in the workforce may vary from country to country. For example, Qatar uses more than 2 million foreign workers.     

 

Figure 1. The evolution of the working-age and total population ratio in the USA and Mexico since 1960. 

The "per capita" definition is crucial for our study, but the real GDP definition is also important. One can be surprised that the real GDP cannot be measured as such. Instead, nominal GDP and GDP deflator are used to estimate the real GDP. The GDP deflator is a tricky variable, which includes direct measurements of a real price change and an estimate of the price change for new goods and services as well as the goods and services changing their own quality and capability (e.g. computers). Moreover, there are new items included in the nominal GDP estimates (e.g. imputed rent). All these aspects in the estimation of real (and nominal) GDP are well described and reported by national agencies (e.g., BEA). As a result, one can often see a striking comment that the GDP estimates are not compatible over time. 

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