Can per capita income outweigh GDP?

Luxembourg has a higher per capita income than Germany, but it has far less geo-political power.

By , Guest blogger

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    Martin Schulz (L-R) President of the Group of Progressive Alliance of Socialists and Democrats (S&D) in the European Parliament talks with Eurogroup chairman and Luxembourg's Prime Minister Jean-Claude Juncker and Leader of Germany's Social Democrats (SPD) Sigmar Gabriel at the start of a S&D group conference "What Future for the Euro?" in Frankfurt March 18, 2011. Whether comparing Luxembourg and Germany, or the US and China, look to GDP, not per capita income, to determine the countries' strength.
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This editorial by Investor's Business Daily at first seems to dispute the conclusion that China will soon surpass the United States as the world's biggest economy, only to later argue that it almost certainly will, but that China's per capita income will never surpass America's, and per capita income is the only relevant issue.

But that is not really true. It is true that per capita income is what matters for living standards. But total GDP is what matters for economic power of different countries. That is why the government of Luxembourg has almost no influence while the German government is very influential, despite the fact that per capita income is significantly higher in Luxembourg than in Germany. And that is because total GDP is far bigger in Germany as the higher Luxembourgian per capita income is more than outweighed by the fact that Germany has 82 million people while Luxembourg only has 0.5 million people.

Note that this is not just important for the geo-political power of governments. It is also relevant for businesses in terms of where to invest in marketing (at a given cost of marketing, it is better to do it in a big market) and in many cases also where to invest in production, as artificial (like tariffs) and natural (shipping costs) trade barriers makes it better all else being equal to produce close to where potential customers are. Since they are neighbors and have no artficial trade barriers, this has little relevance for the cases of Luxembourg and Germany, but it does for example have relevance for the cases of the United States and China.

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