Wednesday, February 17, 2016

The U.S. Economy Versus the World

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The U.S. Economy Versus the World

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In the 1970s, Americans grew up with two myths.

The first myth was that the Soviet Union would dominate the U.S. militarily. The second myth was that the Japanese would dominate the U.S. economically.

With the Soviet Union erased from the present-day map of the world and the Japanese stock market falling to below levels it last traded at in May of 1986, both fears seem almost quaint today.

Yet, until a year ago, the conventional wisdom that Brazil, Russia, India and China -- the BRIC countries -- were set to dominate the United States was just as compelling.

The U.S. Economic Map: Size Matters

 With the U.S. political scene dominated by partisan vitriol, soaring taxes and health care costs and small businesses being crushed by suffocating regulations, it’s worth reminding ourselves where the U.S. economy stands in comparison to the rest of the world today.

Despite the high economic growth rates of developing nations, the United States is by far the world’s wealthiest nation, as measured by gross domestic product (GDP) -- the broadest measure of economic wealth.

The rest of the world doesn't even come close.

This year, U.S. GDP should hit $18 trillion.

That means that the U.S. economy is about as large as the next three-largest economies in the world -- China, Japan and Germany -- combined.

Since 2003, Earl Fry, a professor of Political Science at Brigham Young University, has been producing U.S. maps on a regular basis where the states are renamed with countries that have similar GDP levels.

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The 2014 version of the map -- which you can see here -- puts the size of the United States’ global rivals in perspective.

On the map, the name of each state is replaced by a country whose GDP equals approximately that state’s gross state product (GSP).

A quick glance at the map leads to some fascinating -- and unexpected -- comparisons.

If it were a stand-alone country, California would be the eighth-largest economy in the world and approximately the size of Brazil's economy. Texas’ economy is half the size of California’s and its GSP is comparable to that of Canada. Florida’s GSP is approximately the size of the Netherlands' economy. Illinois’ economy is approximately the size of Saudi Arabia's. Pennsylvania’s economy is roughly the size of Switzerland's. New York’s GSP is the size of Spain's economy, and Georgia’s economy is the size of Norway's. Bill Clinton’s home state of Arkansas, one of the poorest states in the United States, is approximately the size of Ireland’s rebounding economy.

The U.S. Economic Map: Three Caveats

Looking at the United States versus the world this way comes with several important caveats.

First, the map is based on nominal GDP -- how much wealth is generated in dollar terms -- and not how many goods and services those dollars buy.

Economists and the media often prefer to use "purchasing power parity" (PPP) when comparing the size of global economies. Think of PPP as similar to a "cost of living adjustment" on a country level. Within the United States, $50,000 in Kansas buys you a lot more than it does in Manhattan. That’s why on a purchasing power basis, China’s economy has already surpassed the United States, while in absolute terms it’s only about 60% of the size of the United States.

Second, the map does not adjust for population. This has huge implications for what economic wealth means to citizens. California and Texas have a combined population of 66 million, while China’s population is 1.36 billion. Let’s say China does become the largest economy in the world in 20 years. Yet, because of its large population, even if it continues growing at its current pace (a huge assumption), by 2050 it will only be as wealthy as former Communist bloc countries in Eastern Europe are today.

Finally, a look at the map frozen in time, while reassuring, also hides some dynamic changes. When I first looked at this map in 2007, Germany and China -- at the time #3 and #4 on the list of the world’s largest economies -- were both smaller than the economies of Texas and California combined.

Today, the comparison with Germany still stands. But China is now more than twice as big as the two largest U.S. states together. In 2007, India’s $800 billion economy was on par with Florida. Today, India’s economy is 2.4 times larger than the Sunshine State.

China and India have clearly made great leaps forward in both absolute and relative terms.

The U.S. Economic Map: The Past… and The Future

In 1790, the United States was a new, tiny nation of 4 million, about the size of Ireland today. Europe’s population was 180 million, while India’s was 190 million and China’s was 320 million. Only seven cities had a population of 5,000 or more; just 12 had a population greater than 2,500. The United States had an agricultural economy with practically no factories.

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Fast forward to 1885, the United States was the world’s #1 manufacturer, producing almost 30% of the world’s manufactured goods to outpace both the British Empire and Germany. Today’s leading cutting-edge global industries -- whether taking root in Silicon Valley, in Hollywood or on Wall Street -- are still products of the U.S. economic experiment.

Despite its challenges, in 2014, the United States produced 22.5% of the world’s GDP with only about 4.6% of the world’s population. Although the U.S. economy was not as dominant as it was directly after World War II, the rest of the world (outside of China and India) has hardly fared better since the 1980s. The Japanese economy has not matched U.S. growth rates for the last two decades. Europe barely ekes out an economic growth rate of 1%. And how sustainable and real the Chinese economic expansion of the past two decades is remains to be seen.

The world has been counting out the United States' contribution as far back as I can remember.

That U.S. economic map though provides a vivid reminder of just where the United States stands in the bigger picture.

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In case you missed it, I encourage you to read my Global Guru column from last week on the "fight another day" principle of George Soros. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

Nicholas Vardy
Nicholas A. Vardy
Editor, The Global Guru

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