by Jurgen Brauer, August 2006
Copyright: J. Brauer. No reproduction without permission.

Most people know that when doing year-to-year comparisons of national economic production (called gross domestic product, or GDP for short) , one must adjust for the effects of inflation. For instance, if GDP was US$1,000 in 2003 and US$1,100 in 2004, the US$100 or 10 percent increase would in part be due to higher prices rather than to higher production. Thus, if inflation between the two years was say 6 percent, then the real economic growth would only be 4 percent.

For years the United States has lamented the relatively poor inflation-adjusted economic growth record of its major economic and political allies, in particular Canada, Japan, France, Germany, Italy, and the United Kingdom. That is, the other six countries in the so-called Group of Seven, or G7. After inflation, the real economic growth of these seven countries for the past several years is as follows:

Table 1: real GDP growth (in %)

	2001	2002	2003	2004	Rank (2004)
France	1.85	1.03	1.09	2.32	4
Germany	1.24	0.06	-0.19	1.63	6
Italy	1.80	0.34	0.04	1.07	7
United Kingdom	2.18	2.00	2.52	3.13	2
Canada	1.77	3.07	2.00	2.93	3
United States	0.76	1.61	2.72	4.23	1
Japan	0.38	0.13	1.78	2.30	5

The United States had a recession in 2001 (unrelated to 9/11, incidentally), hence its sluggish performance that year. Since then its economy recovered and took the number one rank in 2004, leading the number two ranked country, the United Kingdom, by 1.1 percentage points which is indeed a substantial difference. Japan did very poorly in 2001 and 2002 (actually since the early 1990s!) but recently has shown economic growth improvement. Germany suffered recessions in 2002 and 2003. So did Italy, and France barely grew at all. Finally, Canada and the U.K. appear to have done alright throughout this time period.

But there is something wrong with the numbers: what counts is not only how much the economy has grown but by how much it has grown per person. At a minimum, therefore, the GDP figures need to be adjusted not only for inflation but for population growth as well. The figures in the next table display the record.

Table 2: real GDP growth per person (in %)

	2001	2002	2003	2004	Rank (2004)
France	1.24	0.36	0.43	1.69	5
Germany	1.06	-0.11	-0.23	1.65	6
Italy	1.73	0.03	-0.75	0.08	7
United Kingdom	1.80	1.65	2.13	2.65	2
Canada	0.68	1.93	1.08	2.03	4
United States	-0.28	0.61	1.73	3.25	1
Japan	0.15	-0.10	1.56	2.27	3

The United States retains the number one rank in 2004 but now by 0.6 percentage points only. About half its advantage over the U.K. disappears because that country's population growth was only half that of the U.S. In 2004, Germany and Japan had population growth very close to zero which is the reason why their respective GDP growth numbers between the two tables do not change much. The U.S. recession in 2001 is now much more apparent (negative economic growth per person), as is the very sluggish recovery in 2002 and 2003 with "normal" growth (above 2 percent per person per year) only showing up as from 2004. Whereas in the first table we note only one negative sign (Germany in 2003), the second table shows five negative signs – and several "near misses," for instance in the case of Italy.

The interaction of of economic growth and population growth is important enough for advanced countries such as those of the G7. It is even more important for poor countries because they are often characterized by high population growth rates. In 2004, the Ivory Coast, a country in West Africa, for example had economic growth of -2.0 percent (probably because of the civil war). In addition, it had population growth of 2.0. In other words, not only did the economy shrink, but the shrinking pie had to be distributed over a larger number of hungry mouths to feed! For the Ivory Coast, economic growth per person thus turned out to be a negative 4.0 percent. That hurts! Other countries with negative growth per person in 2004 include the Central African Republic (-0.8), El Salvador and Eritrea (both -0.2), Haiti (-5.5), Mali (-0.3), Niger (-1.9), West Bank & Gaza (-5.6), Yemen (-0.4), and Zimbabwe (-6.7).

Some countries experience population declines (negative population growth). Therefore, their economic growth numbers will be boosted because a larger pie is distributed over a smaller number of people to feed. Countries with declining populations include Armenia (-0.5 percent average annual decline, 2000-2004), Belarus (-0.4), Bulgaria (-0.9), the Czech Republic (-0.2), Georgia (-1.1), Kazakhstan (-0.2), Latvia (-0.7), Lithuania (-0.5), Moldova (-0.4), Poland (-0.3), Romania (-0.7), Russia (-0.5), and Ukraine (-0.8). Remarkably, all of these are part of the former Soviet empire and all of them, for 2004, show exceptionally high economic growth rates per person.

Just as the news media had to learn to report inflation-adjusted economic growth, in future it must learn to report inflation and population-adjusted economic growth.