Mesa Community College Gross Domestic Product Discussion

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THE ECONOMIST Finance & economics | Free exchange

America v Europe: A comparison of riches
leaves both sides red-faced
Lessons from David Hockney’s mother
Aug 11th 2022
When David Hockney’s mother visited the British artist in Los Angeles she made an
observation that points to the difficulties with transatlantic economic comparisons.
“Strange,” she said, after a couple of days in the sun, “all this lovely weather and you never
see any washing out.”
It is an observation many European visitors have echoed. American travellers to Europe,
meanwhile, often despair at washer-dryer machines that leave clothes damp. Indeed, for
some American writers the lack of standalone dryers is symbolic of the continent’s
backwardness. While economic statistics should solve such debates—by allowing for
apples-to-apples comparisons—they are not immune to the problems posed by cultural
differences. Is it that Europeans cannot afford proper tumble dryers? Or are they simply
getting their “drying services” free of charge?
Questions like these are important when comparing countries. On the surface, America has
by far the best case for prosperity. Gross domestic product (gdp) per person is almost
$70,000. The only European countries where it is higher are Luxembourg, Switzerland,
Norway and Ireland, where figures are distorted by firms’ profit shifting. In Germany,
Europe’s economic powerhouse, gdp per person (adjusted for purchasing-power parity) is
$58,000. That puts it level with Vermont, but far below New York ($93,000) and California
($86,000). The comparisons are even less flattering for other European countries. Incomes
in Britain and France are equal to those in Mississippi ($42,000), America’s poorest state.

Yet a lot is hidden by these figures. To understand why, consider how they are calculated.
Spending is deflated by some measure of price, to allow accurate comparisons between
countries of the amount of goods and services purchased. For manufactured goods this is a
straightforward calculation: the amount Americans spend on dryers, divided by an index of
their cost, will give a pretty accurate figure for total consumption.
For services, it is harder to work out a reasonable deflator. And that matters because it is
here, rather than household appliances, where Europe and America differ most. Combined
spending on health care, housing and finance accounts for about half the difference in
consumption between America and the biggest European economies. In 2019 Americans
consumed $12,000-worth of health services per person; Germans managed just $7,000.
The difficulty in working out a reasonable deflator is partly conceptual. What are people
paying for when they buy health care, a service or an outcome? Is a unit of “health-care
services” the cost of a specific treatment or the cost of health? What does being healthy
even mean? International price indices simply (and a little unsatisfactorily) calculate the
price per treatment. These differ substantially. The oecd, a club of mostly rich countries,
estimates that a hip replacement in Norway costs seven times as much as one in Latvia and
Lithuania. In any case, while American prices are higher than European ones, the gap is not
big enough to account for the difference in health-care consumption: Americans also
undergo lots more medical treatment.
Simon Kuznets, a Nobel-prize-winning economist and statistician, suggested estimates
of gdp should exclude things an “enlightened social philosophy” would consider harms
rather than benefits. For him, that included weapons, advertising, much of finance and
anything necessary to “overcome difficulties that are, properly speaking, costs implicit in
our economic civilisation”.
Many Europeans would suggest this category rightfully includes American health-care
spending. Life expectancy in America is five years lower than in Italy; lots of money is spent
fixing the damage done by higher levels of violent crime, traffic accidents and obesity.
Follow Kuznets’s advice—by removing from the calculation finance, health, public
administration and defence spending—and the gap between America and Germany
in gdp per hour worked drops from $11 to just $4.
Much of the remaining gap is accounted for by “housing services”, a category of
consumption similarly bedevilled by conceptual difficulties. International comparisons are
done on the basis of the rental cost per square metre. That flatters sparsely populated
America and its sprawling cities, where rents are generally cheaper. While nearly everyone
would rather have a bigger house, preferences for suburban over urban living are hardly
universal.
Top dollar
There are diminishing returns to America’s spending on health care. But treating all of it as
an additional cost would be a mistake. Cancer survival rates are higher in America than
Europe. Health-care spending can be considered a luxury good that a richer country may
choose to spend more on (Germany, Norway and Switzerland spend the most in Europe).
Meanwhile, as American defence hawks like to point out, Europe’s low military spending is
possible only thanks to America’s largesse and the security it provides.

America has other genuine advantages. The combination of higher productivity and the fact
that workers spend more time at work allows Americans to enjoy greater quantities of
consumer electronics, cars, furniture and clothes. The only categories in which Germans
and the French consistently consume more are education, spending abroad, and food and
drink, suggesting there is something to stereotypes of Europe’s cosmopolitan café culture
and America’s infatuation with consumer goods.
Still, while arguments can be made for Europe, there is no way of slicing the data, despite
your columnist’s best efforts, to make the continent’s biggest economies richer than
America. Even in the areas where Europe does consume more than America, the old-world
economies are not ahead by much. Maybe the true lesson of the comparison is that neither
side ought to be satisfied: Europeans should be unhappy with their lower incomes;
Americans really should be getting a lot more from their riches.

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