gdp per capita formula

7/27/2019 GDP Per Capita Formula

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The data on this page are

current as of March 2013.

Income Per Capita

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Income Per CapitaThe annual gross

domestic product divided

by population. This is the

same as GDP per capita

or standard of living.

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Page 1 of 5Canada Income per capita (GDP per capita) country ranking

04/04/2013http://www.conferenceboard.ca/hcp/details/economy/income-per-capita.aspx


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What is the connection between productivity and per capita income?

The most important determinant of a countrys per capita income, over the longer term, is the level of and growth in

productivity. Why? Because there is no limit to productivity growth. There is a limit to how many hours there are in

a day that employees can work, how low the unemployment rate can go on a sustained basis, how high the labour

force participation rate can rise, and how large the proportion of working-age people within the total population can

be. But innovation and technological change can sustain productivity growth indefinitely, and drive the growth rate

over time.

In the equation below, productivity is the only component with no upper limit. Therefore, improving productivity in

Canada is the only sustainable way to reduce the sizable gap between Canadian and U.S. income per capita that has

emerged in recent decades.

Why is Canadas income per capita lower than that of the United States?

Lower labour productivity accounts for the largest component of the income gap between Canada and the United

States. To get an idea of the role each component of income per capita plays in the CanadaU.S. income gap, we

used the equation shown above, substituting U.S. data for one component at a time, and keeping the country data

for the other four components. For example, to calculate what portion of the Canada-U.S. gap in income per capita

is due to Canadas lower labour productivity, we substitute U.S. labour productivity into the equation but keep

Canadian data for the other four components (hours worked, unemployment, labour force participation, and

demographic structure). When Canadian data are used for all five components, the income per capita in 2011 is

calculated as US$36,168. If we use the Canadian data for four of the components, but use the U.S. productivity

level (which is US$52.40 per hour worked) instead of the Canadian productivity level (which is US$41.50 per hour),

the income per capita in 2011 is $44,638. This means that Canadas lower level of labour productivity is causing its

income per capita to be US$8,500 lower than it could be.1

The results for Canada are described here and shown in the chart below. (The chart also shows result for all the

other peer countries.)

If Canadas level of labour productivity had increased to the U.S. level (and the other four factors had stayed

the same), Canadas income per capita would have been $8,500 higher. If Canadas hours worked had increased to the U.S. level (and the other four factors had stayed the same),

Canadas income per capita would have been $1,500 higher.

If Canadas ratio of employment to its labour force had decreased to the U.S. level (and the other four factors

had stayed the same), Canadas income per capita would have been $500 lower.

If Canadas labour force participation rate had decreased to the U.S. level (and the other four factors had

stayed the same), Canadas income per capita would have been $2,000 lower.

If Canadas share of working age people had decreased to the U.S. level (and the other four factors had

stayed the same), Canadas income per capita would have been $1,000 lower.

So, in Canadas case, lower labour productivity and fewer hours worked caused Canadas income per capita to be

lower than that of the United States. What helped to narrow the gap? Canadas higher ratio of employment to its

labour force, higher labour force participation rate, and higher proportion of working age people all helped to push

up Canadas income per capita relative to that of the United States.




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Statistics Canada has raised questions about the reliability of the measures commonly used to compare Canadian

and U.S. income per capita.2 Shortcomings have been noted in the data on coverage, concept, and accuracy of

hours of work. However, even with adjustments to account for these shortcomings, productivity still contributes to a

significant portion of the gap in income per capita with the United States. The Conference Boards longstanding

message has not changed: Improving productivity should be a policy priority in Canadait is the only sustainable

way to narrow the CanadaU.S. income gap.

Use the drop-down menu to see the factors affecting the income gap with the U.S. for different

countries.

Does having higher labour productivity than the U.S. guarantee that a country will alsohave higher income per capita?

Not necessarily. Ireland and Norway both had higher labour productivity than the U.S. in 2012. But only Norway

with with its huge oil and gas revenueswas able to convert this into higher income per capita than in the United

States.

Why is Norway so much richer than Canada?

Both Canada and Norway have benefited from higher world energy prices, but the oil and gas sector accounts for a

much larger proportion of the economy in Norway. There are also some differences in the relative mix of oil and gas

produced in the two countries, with Canada producing relatively more natural gas (and the North American price has

declined in recent years) and more heavy crude oil, which is worth less than light oil.

What do higher oil prices mean for Canada and Norway?

Higher oil prices are a net positive for both Norway and Canada, but each country is facing different pricing and

related fiscal conditions. North America is currently awash in oilU.S. production is surging in states like North

Dakota and Texas, while Canadian production is also on the rise and will continue to increase steadily over the next

15 years. The benchmark price in North America, West Texas Intermediate (WTI), is about $95 per barrel, but

Canadian producers are getting far less, partly because of a lack of pipeline capacity to handle exports to the United

States and other global markets. In contrast, the European benchmark price, Brent, is about $110 per barrel.

Western European prices are bolstered by stronger demand coming out of developing regions and never-ending

geopolitical turmoil from key producing regions in the Middle East.

Both Norway and Canada made plans to save some of their oil revenues for the inevitable rainy day, but their fiscal

strategies are now diverging. In Norway, concerns about the longer term sustainability of North Sea oil and gas

production (some analysts say this production has already reached or passed its peak) led the Norwegian

government to establish the State Petroleum Fundnow called the Government Pension Fundin 1990. A portion of

annual oil and gas revenues flows into the fund every year. Norway has consistently put aside part of its resource

surplus into the fund and, as a result, it is one of the largest sovereign wealth funds in the world.

In Canada, Alberta has two savings funds for its oil and gas revenues. The firstthe Alberta Heritage Savings Trust

Fundwas established over 30 years ago to save about 30 per cent of oil and gas revenues for the provinces long-

term future. Unfortunately, for nearly two decades, the real value of this fund has not increased in any significant

way, as successive governments decided to use the royalty revenues to fund current spending, not to invest for

tomorrow. Had the Heritage Funds original intentions been adhered to over the past three decades, the value of

that fund could easily exceed $100 billion today.

A second savings account called the Alberta Sustainability Fund was created to manage short-term revenue

fluctuations. This fund grew quickly during the boom years, but the value has since dropped from $17 billion to

closer to $3 billion by fiscal-year 2013. The remaining savings could easily be absorbed by the government.




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In short, Norway and Alberta, Canadas top energy producer, each had a long-term vision for managing their energy

wealth, but they have adopted different strategies and are headed in different fiscal directions.

Has Canadas report card on income per capita improved?

Canadas relative position among its peer

group of countries has slipped. In the

1970s, Canadas GDP per capita was

US$20,340, the fourth highest of its peer

countries, earning a B grade. This gradewas maintained in the following decade

but dropped to a C average in the

1990s and 2000s.

Many countries saw their letter grades

slip in the 1990s and 2000s. This does

not mean that income per capita was

falling, but it does indicate that the top

countries were setting the bar higher

every year, thereby further widening the

income gap with Canada. In other words,

the top countries were pulling farther

ahead of the pack.

Canada will find it increasingly difficult to

narrow the gap. Countries with lower

income levels need greater and sustainedincome growth to try to match or exceed

superior economies.

Has any country managed to move up in the income per capita ranking?

Until recently, Ireland was the standout success story. Ireland transformed itself from one of the poorest countries

in western Europe to one of the richest. After its chronic showing as a D performer in the 1970s, 1980s, and

1990s, Ireland jumped to 3rd place in the 2000s. In the 1970s, Canadas income per capita was almost double that

of Ireland; by 2007, Irelands income per capita exceeded Canadas by US$5,000 in 2007, although the gap slipped

to only US$800 by 2012.

What ignited Irelands economy? A number of parallel developments played significant roles. These include prudent

fiscal policy, increased European Union structural funding, development of the single European market, lower labour

costs, and deep cuts to corporate tax rates. Irelands FDI-friendly environment certainly provided a strong

foundation for growth. The result was a substantial increase in foreign direct investment into the country.

Ireland has once again fallen on hard times since the 200809 bursting of the property bubble and associated

banking crisis that imposed a huge fiscal and economic cost on the Irish people. Nevertheless, the foreign

investment segment of the Irish economy has been able to sustain its level of activity, and provides a cornerstone

for rebuilding the Irish miracle, if and when the domestic economy can recover.

Footnotes

1 Note that the individual gaps generated using this methodology will not necessarily match the overall Canada

U.S. income gap shown in the first chart.

2 Jean-Pierre Maynard, The Comparative Level of GDP Per Capita in Canada and the United States: A Decomposition

Into Labour Productivity and Work Intensity Differences (Ottawa: Statistics Canada, 2007).

Economy Indicators

See discussions on other indicators

Income Per Capita Unemployment Rate

GDP Growth Employment Growth

Labour Productivity Growth Inward FDI Performance Index

Inflation Outward FDI Performance Index

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gdp per capita formula

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