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Aggregate vs.

Per Capita GDP: Comparison of Growth


Sensitivity to Policy Variables

Md Arifur Rahman
Memorial University of Newfoundland
Email: marifurr@mun.ca

November 2, 2018

Abstract This article compares the sensitivity of aggregate and per capita GDP growth to the
changes in fiscal and policy variables on a sample of one hundred countries over the last 40
years. The competitiveness of both the growth variables for the purpose of econometric is also
tested. It was found that per capita GDP is less sensitive to policy changes and hence less
competitive as regressand in econometric modelling, Moreover, there is a persistent and posi-
tive stationary difference between aggregate and per capita growth. The inclusion of population
growth improved the explanatory power of the model in answering the cause of the difference.
Coefficients of all the policy variables except that of the interest rate are found significant and
consistent with their a priori behaviour.

Keywords GDP, Aggregate Growth, Per Capita Growth, Stationary Distribution, Panel Data

1 Introduction
Most of the European and North American nations experienced unprecedented growth in na-
tional output and living standard since the end of World War II. These economies are the winners
of globalization (Milanovic, 2007). The scale of these economies has grown to a level incom-
parable to that of others. For example, since 1990 the G8 nations grew at a rate of 12.53%
annually. In the same time, the rest of the world grew only at a rate of 2.81%. Thus at the end
of 2017, the total size the output of G8 economies was $42.72 trillion which is 33.48% of the
world economy. On the other hand, these eight countries share only 10.78% of the global pop-
ulation. If we consider per capita GDP a measure of living standard, then an average citizen of
G8 countries enjoy 30 times better living standard than someone from rest of the world. These
numbers are quite intense to understand the degree of income inequality in the cross-national
aggregate and per capita income distribution. Piketty (2014) investigated personal income and
wealth distribution of twenty high-income economies in Europe and USA. He showed that the
main reason for such persistent inequality is far more unequal wealth distribution which keeps
growing at a rate higher than that of income. The proposed research seek to test the hypothesis
of Piketty (2014). The study will collect and analyze 40 years’ cross-national income and wealth
data from 100 countries with an objective to estimate country level GINI index and develop a
model to understand the impact of wealth on income inequality. It is expected that the final
findings of the study would help the economists and researchers who are working on income
inequality by providing a primary relationship equation between wealth and income. The study
would make it possible to estimate impact of various level of wealth inequality on household and
aggregrate income growth.

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2 Literature Review
There is plenty of scholarly literature available on income and wealth inequality. The oldest
scholarly research on inequality is probably conducted by Lorenz (1905) who provided a distinct
statistical method for measuring the concentration of wealth. Subsequently, in 2012 Corrado
Gini, an Italian statistician used Lorenz curve to develop the most popular index of inequality
which is now called GINI index (Ceriani and Verme, 2012). Kuznets (1953), the architect of
gross measures of national income, believed that inequality prevails at the early stage of eco-
nomic development and as the economy continues to grow the inequality tends to reduce. In
mid-1950s many wealthy nations started keeping national income account and made those pub-
licly available. With the availability of data, many researchers started contributing to this field
of research by applying the Gini index and other measures of income inequality. Using gross
national income was particularly problematic in measuring the Gini index. As a result, per capita
GDP and income gained popularity among researchers (Mbaku, 1997). In summary, the first
half of the nineteenth century was mostly about the development of the framework of economic
data collection and the development of theories about economic growth and performance mea-
surements. And the second half of the last century was about the collection of data, testing
of hypothesis, discussion, and debate on economic theories. At the beginning of the twentieth
century, the field of economic research started facing new challenges: increased complexity of
economic activities and abundance of data. This situation triggered the rise of data science and
econometric analysis. Granger (2004) work on economic time series analysis and cointegration
was particularly invaluable. The work of other econometricians such as Kydland and Prescott
(1990)’s work on business cycle analysis started becoming relevant and popular by the time.
While the field of data science and econometrics started gaining popularity, the dispersion of
income kept rising within the most country (Deaton, 2014). Though little late, Piketty (2014)
started bridging the gap between the study of inequality and econometrics. He collected 200
years’ income and wealth data of twenty high-income countries and conducted empirical re-
search. He found that the rate of return on capital had been higher than income growth during
the last century. And as the wealth distribution is suffering the Pareto syndrome, income is also
suffering from the same. The works of Deaton (2014) and Piketty (2014) refute the assumptions
of Kuznets (1953) about economic growth and inequality. Furthermore, the application of theo-
ries developed during the last century did not help that much to reduce economic inequality. To
many economists, this is the end of an era of economic thoughts and researches that empha-
sized aggregation and economic growth over equality. Therefore, it is time to take on inequality
and put it in the center point of the growth equation.

3 Methodology

4 Data
The estimations of the study use annual observation from 1977 to 2016 for 100 countries. The
dataset is an unbalanced panel data. List of variables are presented in Table 4.1.

References
Ceriani, L. and P. Verme (2012). The origins of the Gini index: extracts from Variabilita e Muta-
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Economic Review 94(3), 421–425.

2
Kuznets, S. (1953). Shares of upper income groups in income and savings. Number 55 in
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Kydland, F. and E. Prescott (1990). Business cycles : real facts and a monetary myth. Fed-
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