Okay. GDP is a flow variable defined for a specific geographical location over a specific time period. There are a variety of ways to calculate GDP, but the easiest to grasp intuitively is the following: take the sum of all final sales of goods and services at current market prices within, say, the UK during 2010. That gives you UK nominal GDP for 2010. Real GDP is NGDP adjusted for constant prices. This gives us a measure of a country’s (real and nominal) income in a given period.
GDP per capita is average income—specifically, mean income. To find PC GDP we take current GDP and divide by the population. Per capita GDP provides a measure of living standards in a country. For example, consider China. At purchasing power parity its current GDP is about $10 trillion. Compare this to Qatar, whose current GDP (again, at PPP) is about $150 billion. So China’s national income is about 4 or 5 orders of magnitude greater.
Pretty neat, huh. What with all those people, China’s aggregate income is huge. Unfortunately (for all those people—because of all those people), its living standards are pretty miserable compared to the vastly poorer (on an aggregate basis) Qatar. Humble Qatar has an average income of about $90k, whereas in China that figure is around $7.5k. In other words, the average income in Qatar is over an order of magnitude greater than in China.
This is the problem of straight comparisons of GDP. Because they don’t take population size into account, while they may give you some idea about the power of a state in an international context, they don’t tell you much about the living standards of people within that state. It is, as we’ve just seen, perfectly possible for GDP to be very high and per capita GDP to be quite low.
In your reply you discuss per capita GDP in rather strange terms, and I’m struggling to understand what you mean. You write that there are “traditionally two calculations for per capita GDP… initial population divided by its gross domestic product… initial population (plus one migrant) divided by its gross domestic product…. My argument is that the first calculation arbitrarily ignores the migrant until he enters the borders of the state.”
I think you may be getting a bit confused here (or, of course, it could be me). Firstly, it’s GDP over population, not population over GDP. More importantly, the calculation of GDP per capita arbitrarily ignores everyone not within the borders of the state—that’s what GDP per capita is. Otherwise, you have a different measure entirely, and not one that makes a lot of sense, as far as I can see. F’rinstance, surely the correct answer to the question, what’s UK GDP divided by global population, is who the fsck cares?
When migrant moves to a new country the initial effect must by definition be to reduce per capita GDP, unless you think that the economy instantaneously and magically expands to accommodate the new individual and provide him with the level of income that currently obtains in his new home. If it were really this simple, we wouldn’t ever need govt intervention in the economy.
Think of the economy as comprising a supply side consisting of firms, and a demand side consisting of consumers who also supply factor services to the firms. When a new migrant enters the country, he may add to the supply of factor services (labour, mostly), and he may add to demand in product markets, but he does not as general rule, bring a successful firm with him. At the margin, for the firms in the medium term, labour may have gotten a little bit cheaper, and they maysubstitute away from capital towards it, and demand might shift a little bit to the right, but how does the whole economy get more productive? I am not asking how it can be the case that GDP is higher, the fact that GDP is increasing in population size is not a very interesting fact. I want to know how the economy does more with the same amount of inputs, after the migrant arrives.
I did mention total factor productivity, but that was supposed to be a joke! TFP is a residual (i.e., what can’t be explained by physical inputs). It’s not an explanation of the putative mechanism by which immigration makes the economy more productive on a per capita basis.
Here’s what I thought when I read the abstract of the paper you posted. Is there anything special about migrants, or will this work for anyone? Let’s say that there’s a birthrate explosion and the US starts to resemble Ramallah in terms of population density. Is this likely to coincide with an explosion in productivity? If not, why not? I.e. is it just about the sheer number of bodies in your view or is there something else going on?
Let’s say we take a bunch of unemployed people from Detroit or Michigan, and move them down to Texas. Explosion in TFP? Or does that only work if there’s a border with Mexico involved? If it works with anyone, I have a brilliant scheme to return the US to its glory days of economic growth: Everyone has to move state at least once a year. Ta-da!
Finally, if immigrants increase per capita income here, what do they do to per capita income there when they leave? Interested to hear your views. Cheers.
I am sure all of these things are true and, for your sake, I wish that you were getting the large pay rise you undoubtedly deserve.
However. Just as your cost of living has risen, your employer’s cost of employing you has risen. Your employer’s costs generally are subject to the same inflation as your costs of living—all of his/her non-payroll overheads will have increased in line with inflation. And if you take into account the rise in employers’ NI, the likely drop in incomings, and the 3% of salary statutory pension contribution s/he will have to contribute for you next year, it is not entirely unreasonable to speculate that the rise in the cost of employing you is more than the 2.2% of your salary you are being offered as a pay rise.
In a situation where your employer’s profits are rising and you are contributing substantially to this fact, things might be different—and maybe this is in fact the case, which would be useful of you to elaborate upon. Perhaps profits are increasing by more than the rate of inflation, in which case a pay rise is in order. On the other hand, perhaps revenues are dropping at greater than the rate of inflation.
It might also be helpful to know why you feel your bargaining position—your power—is inferior. Are you a key employee? Would your employer’s business suffer measurably if you were to leave? Are you a critical employee but for some reason unable to leave? If job mobility is difficult for you, you could certainly find yourself in a disadvantageous position. On the other hand, perhaps you are not a key employee in terms of generating revenue or in terms of unique skill sets, and your employer feels s/he could replace you with someone equally local who doesn’t command your salary premium due to education level or employment background.
I guess what I’m saying is, these considerations could all be the case, and it’d be cool to know a bit more just from the economics side of things, but at the moment it doesn’t seem to me like your employer is being totally unreasonable.
On a slightly related note, I would add that everyone at the company where I work is woefully underpaid when you consider the market rate, and many of us have not had a pay rise since before the recession began, but we continue to work there. There are other types of compensation than money, and I would be interested to know whether you feel you derive these from your current job.
This post is a commitment device, but I also wanted to highlight two very interesting comments.