the Wealth of Nations
What can be asserted without evidence can also be dismissed without evidence. — Christopher Hitchens
The first step in understanding why some nations are rich and others poor is to measure wealth. We noted how a nation’s wealth results from the ongoing process of creating things other people value. One of the most common measures of this concept is referred to as a nation’s gross domestic product or GDP. GDP provides an estimate of the value of all final goods and services produced in a nation during a specific period of time, such as a year. Instead of the pretentious term GDP, from this point on we will refer to GDP simply as a nation’s output.
Comparing the wealth of one nation to others involves a number of potential problems. Among these is the issue of converting currencies. Since each country reports its output in its own currency, comparing the wealth or output of one country to that of another involves converting information on output into a common currency.
While currency exchange rates can be used for the adjustment, they don’t measure what we want to measure. Exchange rates show how much of one country’s currency we can get for the other country’s currency at a point in time. This doesn’t tell us how living standards or wealth in one country compares to others. For making such comparisons we want to know how many US dollars it would take to purchase a similar basket of goods and services in each country.
For example, if someone in the US can buy a certain basket of goods for $1,000 and someone in another country can buy a similar basket for 500 units of their currency, it means that their currency has twice the purchasing power of a US dollar.
Since the purchasing power of the other country’s currency is twice that of the United States, we have to double their output in terms of the other country’s currency to make it comparable to US dollars. Purchasing power parity (PPP) is the term used to adjust the value of a nation’s output from its own currency into US dollars. Happily, such a calculation exists and is widely recognized in economic analysis. In this book, whenever we compare one nation’s output, or wealth, to that of another nation we will use the PPP adjustment to make the comparison.
The largest economies in the world are those that produce the most goods and services. The following are world leaders in terms of total economic output.
It’s easy to confuse size with wealth. The saying “size matters” doesn’t apply when referring to a nation’s wealth. China and India are two of the largest economies in the world. Neither is wealthy. These countries produce a lot of output, but each has over a billion people. Dividing a nation’s output by its population provides a more meaningful estimate of the wealth of its people.
Output per person, adjusted for PPP, is the most commonly accepted measure for international comparisons of wealth among different countries. It is also a nebulous concept. Few people can relate to it. What most people can relate to are wages or salaries.
For various reasons, it’s possible to use output per person as a rough approximation of the average annual wage in a country. The data appendix explains why this is so. Hence, whenever you see output per person for any country you can think of it as the average annual wage for the country. Some may prefer to consider the median wage (where there are as many workers earning more as earning less). Reducing the average wage by 20% can provide a rough estimate of the median worker’s annual wage.
With this background information we are ready to begin comparing the wealth of various nations.
The World’s Richest, Poorest & Middle Class Nations
I’ve been poor and I’ve been rich. Rich is better! — Beatrice Kaufman
In 2015, the following nations were the wealthiest in the world. Nations with fewer than roughly five million people and those where oil deposits account for a third or more of their wealth, were not included. With these criteria, Singapore is the wealthiest nation in the world while the United States is the wealthiest of the world’s largest countries. Workers in these two countries produce far more goods and services than workers in most other countries. As a result, the people in these countries have the highest living standards in the world.
In Norway oil accounts for anywhere from 10% to 25% of total output. Hence, at least some of their wealth is due to these natural resources.
In 2015, the world’s population was estimated to be 7.2 billion people. Roughly half of these people lived in countries where output per person was above $14,000. The other half lived in countries with output per person below this level. Hence, the world’s middle class countries are those with output per person in the vicinity of this level.
In sharp contrast to the extraordinary success of the world’s richest nations, and the mediocre performance of others, is the extreme poverty found in those nations where output per person is below these levels. For example, India’s 1.3 billion people live in a country where output per person is only half that of Peru. As poor as India is, there are many nations even worse off.
Abject poverty is the inability to earn enough for basic human needs, such as food, water, clothing, and shelter. Many economies perform so poorly they cannot meet the most basic needs of their people. The World Bank estimates there are roughly a billion people who suffer from conditions of abject poverty.
The International Monetary Fund lists the following nations among the poorest of the poor, defined by output per person.
Redistributing Wealth
The extreme difference in wealth between the wealthiest nations, where many live in luxurious surroundings, and the poorest nations, where billions literally starve, is extremely disturbing. Such inequality leads some to conclude those who live in wealthy countries enjoy their benefits at the expense of those who are less fortunate. Many believe social justice requires the redistribution of income from those who have to those in need.
We are called upon by God and our conscience to help those in need. The character of an individual is measured by the extent to which he or she voluntarily provides for the needs of others from their own resources. Such voluntary giving can relieve the suffering of certain needy individuals. However, there are simply too many aspects of poverty and too many poor people for redistribution of income to make a significant reduction in the world’s poverty.
For example, confiscating 20% of the yearly output from all those in our ten wealthiest countries and redistributing it among those in the bottom half of all nations, it would add only about $1,300 a year to their income. Some of the poor would temporarily have a windfall gain. However, as we will see in subsequent chapters, involuntary redistribution of income permanently reduces future output in successful countries. Ultimately, the reduction in wealth in these countries would reduce any future redistribution. Instead of reducing world poverty, involuntary income redistribution increases poverty.
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