Is NZ poorer than the poorest US state?

Welcome back to Inside Economics. Every week, I answer reader questions about the economic forces shaping our world, as well as taking a deeper dive into some of the left-field economic news you may have missed.

This is usually a subscriber-only newsletter, available only to those with a Herald Premium account — but because you're with us here on LinkedIn, we'll give you a bit more of a look under the hood.

This is a Premium newsletter. To unlock the rest of it, as well as all our Herald Premium content, subscribe here. and if you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz... or leave a message in the comments section.

Poorer than the poorest US state

Q: Hi Liam. I heard a surprising statistic, that the per capita GDP of the UK is lower than that of each of the 50 states in the US. I didn’t believe it but when I looked it up it’s true. Sure you would expect the likes of California, New York, and Texas to have large economies but how do smaller states such as South Dakota, West Virginia, and Mississippi also have such high productivity? Are there lessons to learn for NZ’s economy from these smaller states?

Cheers

Mitra Prasad

A: Thanks Mitra, you raise a very interesting issue. You are right. The latest figures I can find show the poorest state in the United States is Mississippi with a per capita GDP of US$53,000 and, yes, that is above both the United Kingdom and New Zealand at US$52,000 and US$47,000 respectively.

On the face of it, that seems pretty wild. It certainly jars with the version of Mississippi and other southern states that we get through Hollywood and streaming TV shows. What gives?

Firstly, it’s important to recognise that the US is still the world’s largest economy and one of the richest nations on earth. We all know that, but it’s easy to forget how rich it is.

The per capita GDP figure for the US as a whole is US$86,600 ($147,157) which puts it seventh in the IMF’s ranking - behind Luxembourg, Switzerland, Ireland, Norway, and Singapore (in that order). It’s by far the richest big country.

In some ways, the more striking comparison on that list is Ireland which has a per capita GDP of US$103,500 - almost double that of the UK. I doubt anyone would have picked that in the 1980s when the country was one of the poorest in Western Europe.

That does highlight another issue to consider when we look at these lists. Ireland has done really well economically in the past 30 years (although it got hammered in the GFC with a deep recession and unemployment spiking to about 14%).

But it isn’t twice as rich as the UK.

There are limits to how useful GDP and per capita GDP are as measures of individual wealth in a population.

GDP is an aggregate figure for total economic output. When we break it down per capita we get an average for everyone in the population. But that doesn’t account for the distribution of that wealth.

There’s a measure called the Gini Coefficient which economists use to rate the levels of inequality in a population. As the OECD describes it, the Gini Coefficient “is a comparison of cumulative proportions of the population against cumulative proportions of income they receive”.

In other words, how does per capita GDP stack up against median or average wage?

The average salary in Ireland is around US$45,000 ($76,512), which isn’t bad but is a long way from its per capita GDP and only marginally above the UK’s average salary.

Ireland’s GDP growth in the past few decades has been underpinned by low corporate tax rates. That’s led to high levels of investment by international companies. While that has worked to create jobs and boost overall economic activity, a lot of the corporate profits are repatriated to shareholders elsewhere in the world.

What you're missing

This is a subscriber-only newsletter, usually available only to those with a Herald Premium account. Thanks to our partners at LinkedIn News Australia you've been given more of a taste of it.

Here's what's covered in the full edition:

• Is per capita GDP the best measure?
• Productivity warning
• A tale of two outlooks

Thanks to regular readers and especially those who subscribe to the newsletter.

We’ll be back in late January to document the economic recovery and hopefully answer a few more tricky reader questions.

This is a Premium newsletter. To unlock the remainder of it, as well as all our Herald Premium content, subscribe here.