Basic Facts of Wealth

We know that there are rich countries, poor countries, and countries somewhere in between. Economically speaking, Japan isn’t Denmark. Denmark isn’t Madagascar, and Madagascar isn’t Argentina. These countries are all different.

But how different are they?

That question is answered through real GDP per capita—a country’s gross domestic product, divided by its population.

In previous videos, we used real GDP per capita as a quick measure for a country’s standard of living. But real GDP per capita also measures an average citizen’s command over goods and services. It can be a handy benchmark for how much an average person can buy in a year -- that is, his or her purchasing power. And across different countries, purchasing power isn’t the same.

Here comes that word again: it’s different.

How different? That’s another question this video will answer.

In this section of Marginal Revolution University’s course on Principles of Macroeconomics, you’ll find out just how staggering the economic differences are for three countries—the Central African Republic, Mexico, and the United States.

You’ll see why variations in real GDP per capita can be 10 times, 50 times, or sometimes a hundred times as different between one country and another. You’ll also learn why the countries we traditionally lump together as rich, or poor, might sometimes be in leagues all their own.

The whole point of this? We can learn a lot about a country’s wealth and standard of living by looking at real GDP per capita.

But before we give too much away, check out this video -- the first in our section on The Wealth of Nations and Economic Growth.

Macroeconomics Course: http://www.mruniversity.com/courses/p...

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[Alex] We all know that there are
rich countries and poor countries.

The United States?

It's one of the richest countries
in the world

with one of the highest
standards of living.

The Central African Republic

is one of the poorest countries
in the world.

Mexico?
It's somewhere in between.

But just how big
are these differences

between the rich
and the poor countries?

And how do we measure
these differences?

We're going to measure
the differences in living standards

by looking at Real GDP per capita.

That's a country's
Gross Domestic Product

divided by its population.

Real GDP per capita captures

the average individual's command
over goods and services --

their purchasing power.

Or, put another way,
how much stuff,

which we'll picture here
using a basket of groceries,

can an average person
buy in a year?

So, let's start with
the Central African Republic.

This is a small,
landlocked nation in Africa.

It's currently suffering
under a civil war.

It's probably the poorest country
in the world.

In the CAR,
an average person can buy

just six baskets of stuff
in a year.

Now let's consider Mexico,

a country you might be
a little bit more familiar with.

If the average person in the CAR --

if they can buy six baskets
of goods in a year,

how many baskets do you think

that the average person
in Mexico can buy?

Take a moment, take a guess,
make a mental note of it.

We'll come back to that.

Now let's look at the largest
of the developed nations,

the United States.

How many baskets of goods
do you guess

that the average American
can buy in a year?

Okay, have you got your guesses?

Here are the answers.

In our depiction,
each basket is worth

$100 of buying power per year.

Using data from
the International Monetary Fund,

Real GDP per capita --
in the Central African Republic --

it's about $600 per year.

Just six baskets.

Real GDP per capita in Mexico,
in contrast, is $17,800 per year.

Or 178 baskets.

Both of these numbers, by the way,

have been converted to dollars
by taking into account

differences in prices
in these countries.

These are so-called
purchasing power parity conversions --

the most accurate way we know
to compare living standards

across different countries.

Now let's look at Mexico
and the CAR again.

The average person in Mexico --

they can buy 29 times
as much stuff in a year

as the average person
in the Central African Republic.

What about the average American?

Well, this is how much
the average American can buy --

545 baskets.

That's three times more
than the average person in Mexico,

and 90 times more
than the average person

in the Central African Republic.

So, when we're talking
about differences in wealth

between countries --
these are not small differences --

but regularly, on the order
of 10, 20, 50,

sometimes 100 times more
in one country than in another.

And countries that we might
sometimes lump together in our mind

as being poor, like Mexico
and the Central African Republic --

they're not nearly
in the same league.

The prosperity in Mexico --

it's much closer
to the United States than it is

to the truly destitute nations,
such as the Central African Republic.

These huge disparities in wealth,
have they always existed?

Are countries converging?
Are they diverging?

Is it getting better or worse?

Are some countries catching up?

These are all topics
of some of our upcoming videos,

so get ready to dig in.

[Narrator] If you want
to test yourself,

click "Practice Questions."

Or, if you're ready to move on,

you can click
"Go to the Next Video."

You can also visit MRUniversity.com

to see our entire library
of videos and resources.

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