By Erik Lueth
Who’s richer: Japan or China? The answer reveals why GDP per capita doesn’t tell the whole story.
In macroeconomics and macro investing, we tend to gauge a country’s level of development by a single number, its GDP per capita. This number enters rating models, growth models, even long-term currency models.
While useful in some contexts, we lose nuance by attempting to capture the level of development with a single number.
Take the example of the US and the Netherlands. In 2024, the GDP per capita of the US was 27% higher than that of the Netherlands – both measured in current US dollars.[1] However, that is due to a small group of people in the US with very high incomes. The median US income, that is the income of your average Joe with half of the population earning more and half earning less, is 15% below that of the Netherlands.[2] Which country is richer?
In EMs, we lose even more nuance, because the income distribution tends to be more uneven than in advanced economies – even when looking at pre-tax and pre-transfer incomes, as we do. This is due to two factors.
First, as economies develop and people start to move from the low-productivity rural sector to the high-productivity urban sector, inequality rises. Once most people have arrived in the high-productivity sector, inequality start to fall again. EMs usually sit close to the peak of this so-called Kuznets curve.
Second, richer countries have a greater preference for economic security over growth than poorer countries, which is reflected in their institutions (e.g. labour rights) and flatter income distributions even before taxes and transfers.
