Kōrero: National income and GDP

Whārangi 4. International comparisons

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GDP growth rates across countries

Comparing economic growth rates across countries is relatively straightforward because rates of change are compared, rather than actual gross domestic product (GDP) levels. Measures of volume GDP track the growth of the economy over time, comparing one period with another, and international comparisons can be made by simply comparing growth rates given by each country’s own volume GDP series, usually the GDP per capita series.

In the 1970s and 1980s the rate of economic growth for New Zealand was below that of both Australia and the average of all OECD countries (a group of 30 developed economies). After 1990 the situation changed, with the growth rate of the New Zealand economy above the OECD average. In the early 2000s New Zealand’s growth rate was slightly faster than Australia’s.

Although GDP per capita is acknowledged as an incomplete measure of economic well-being, it is a key indicator of relative economic performance across countries.

Comparing GDP levels

Unlike international comparisons of GDP growth rates, comparing GDP levels across countries is not straightforward because each country calculates its GDP and national income statistics using its own prices expressed in its own national currency. In order to compare countries, common prices need to be used, expressed in a common unit or currency. Using currency exchange rates (for example converting New Zealand GDP per capita to US dollars using prevailing market exchange rates) can be misleading because exchange rates are influenced by factors such as currency speculation, and do not reflect standard price levels. Instead purchasing power parities (PPPs) are used.

Purchasing power parities

PPPs are rates of currency conversion that eliminate differences in price levels between countries. They are calculated by measuring the relative amounts of national currencies required to purchase a common ‘basket’ of basic goods and services consumed by households – if a basket of items in New Zealand costs NZ$30 and in Australia A$20, then the PPP between New Zealand and Australia would be 1.5; for every Australian dollar spent in Australia on this basket of goods, NZ$1.50 would have to be spent to buy the same goods in New Zealand.

PPPs for different groups of commodities can be developed, and ultimately aggregated to cover all production measured by GDP.

In 2006 the PPP between New Zealand and Australia was estimated by the OECD at 1.08. Across all the goods and services included in GDP, price levels in New Zealand expressed in New Zealand dollars were approximately 8% above the price levels for similar goods and services in Australia, expressed in Australian dollars. So to compare the GDP between the two countries, it is necessary to divide the New Zealand GDP by 1.08.

Per capita GDP ranking

One of the most frequent uses of PPPs is to compare GDP and GDP per capita levels across countries. These comparisons are approximate indications of the size of economies, and of economic well-being.

In 1976 New Zealand was in the upper half of the OECD per capita GDP table, with per capita GDP approximately 11% higher than the OECD average. New Zealand was approximately 5% below Australia, but higher than a number of similar-sized countries such as Norway and Ireland. Subsequently – particularly during the 1970s and 1980s – the New Zealand economy grew at slower rates than most countries in the OECD, and the relative GDP per capita for New Zealand fell. By 2006 New Zealand was 22nd in the 30-member OECD, with GDP per capita falling to approximately 26% below Australia.

Me pēnei te tohu i te whārangi:

Jeff Cope, 'National income and GDP - International comparisons', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/mi/national-income-and-gdp/page-4 (accessed 20 November 2019)

He kōrero nā Jeff Cope, i tāngia i te 11 Mar 2010