UK not “sixth richest country in world”. Yet…

One of the lines frequently used by those who believe “the Government” should simply find money from somewhere for everything they want is that “We can afford it”, usually followed by “The UK is the sixth richest country in the world”.

The “sixth richest country in the world” figure is deliberately misleading. People using it should be held to account for this.

The figure originates from the total Gross Domestic Product (GDP) of every sovereign state in the world; specifically, it is the total GDP unadjusted for what is known as “Purchasing Power Parity” (PPP), which effectively takes account of the cost of living, and thus the value of a certain amount of money in a certain country.

In other words, the figure originates from the total GDP for each country taking account neither for the population nor for the cost of living. It is almost meaningless. Although the funny thing is, the latest figures from 2014 (confirmed by the IMF, World Bank and CIA) in fact show the UK is in fact ranked fifth (behind only the United States, China, Japan and Germany) on this measure, not sixth.

So the UK by pure GDP (known as “nominal”) is the “fifth richest country in the world”, but that figure is meaningless as it gives no indication as to how rich individuals within its boundaries are (and thus, relevantly to the original point, how much they may be able to contribute in tax and charges to pay for services).

In fact, if you merely take account of PPP, the UK drops to tenth, passed also by India, Brazil, Russia, Indonesia and France. In reality, taking into account the cost of living (and thus the cost of public services), the UK is no better than the “tenth richest country in the world”. Admittedly, all the nine above it have higher populations, but that only brings us to the more relevant figure, namely GDP per head.

(On the latter measure, for the record, the UK will overtake France this year – so “ninth richest country”…)

The much more relevant figure is the country’s GDP per head (often known as “GDP per capita”), because that gives an indication of the real resources available to a population as a whole. For example, Denmark’s population is just over a twelfth of the United Kingdom’s, but its economy (at least, as measured by total GDP/PPP) is approaching a tenth of its size. Clearly, therefore, the Danish have more resources to pay for their public services than the British – they are, in any meaningful sense, “richer”.

Going by GDP per capita, the United Kingdom comes out in the mid-20s globally – about level with France, and 10% behind the likes of Germany, the Netherlands and Denmark. Far from being the “fifth” or even “ninth richest country in the world”, its economic output would suggest it is more like “twenty-fifth” – hardly startling, and in fact positively middling by Western standards.

This is to leave quite aside, of course, that “GDP” is a fundamentally unsound measurement. Within Europe, it is notably skewed in Ireland, where significant foreign investment is added to “GDP” in Ireland but in practice adds to the “GNI” (and therefore the practical resource for public spending) elsewhere, most obviously in the United States. “PPP” is also seriously flawed – watch how the UK shoots up the Eurostat GDP/capita tables in the next couple of years and then deny it is to do with the exchange rate between the euro and sterling settling at a quite different figure from that which prevailed from 2008-14.

As it happens, the UK is in a rather good position over the next quarter century or so, because its companies just happen to have significant amounts of wealth they can release in the coming years and decades – much more so than any comparable economy. This leads to a number of projections, of which this is just one, suggesting the UK’s ranking for GDP/PPP will rise to the top ten in the world by 2030, and to the highest in the European Union (aside from microstates) by 2040. Whether that is particularly meaningful or not (see previous paragraph) is another matter.

By 2050, who knows, the UK may be the “sixth richest country in the world” per head, rather than in total. But to be clear, it isn’t now. And even the most optimistic projections suggest “ninth richest country in the world” may be more like it even then. Let us be clear, therefore, about the resources we really have – as what is currently a middling Western economy.

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2 thoughts on “UK not “sixth richest country in world”. Yet…

  1. Fantastic analysis. However the PPP measurements analysis is rather interesting.

    http://data.worldbank.org/indicator/PA.NUS.PPP

    These World Bank measurements show very little difference between the UK and the Euro-zone, indeed

    The highest PPP measurements in Western Europe are in non-Eurozone states – Sweden, Denmark and non-EU Norway, which are considerably higher above the UK’s. Iceland is considerably high as is Hungary’s. Finland of course is closer to the rest of the Eurozone, but the question remains why there is such a large differential between non-Eurozone nations and the Eurozone in Scandinavia in terms of PPP, and minor differentials between other non-Eurozone nations such as the UK and Switzerland and the Eurozone in terms of PPP.

    This is by no means an absolute relationship. And a low PPP could be just as much a measure of how high the cost of living a place may be, as opposed to how rich the people are.

    Other non-Eurozone countries like the UK and Switzerland seem to have a PPP closer to the Eurozone countries like Germany, R. Ireland, the Netherlands, Spain, Italy, France even Greece etc. than the Scandinavians. The UK is ahead of Greece and Germany, but below Ireland, France and Italy.

    Comparing Russia and Ukraine to Belarus, or Sweden and Denmark to Iceland would suggest that the measure is a closer reflection of inflation than currency strength.

    Despite large fluxuations in the exchange rate between the pound and the euro, purchasing power parity between Switzerland and the UK and Germany, France, the Republic of Ireland, the Netherlands, Spain and Italy is roughly the same in comparison

    There is a question over whether this is due a culture of conformity or a market convergence.

    Does the UK have a “Germanic” fear of inflation and behaves fiscally like the German government (or indeed vice versa) or is it because the UK is more trade reliant with the central Eurozone and its productivity is interdependent on it.

    While the UK might be pushed up the PPP stats by the actions of the ECB, there is very little to suggest its economy will follow the Nordic non-Eurozone countries to the very top.

    • That’s all true, but slightly misses (or arguably makes) my point. Whether the cost of living is high or low in UK v Eurozone obviously depends on the currency differential. If PPP assumes that they are more or less even, that is the problem – they’re not!

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