How Should I Compare Countries?

I remember a couple of years ago I met one of friends for dinner. We started discussing latest news and the conversation diverted towards comparison of different countries. Our assessment of countries was purely based on our own opinions and we couldn’t associate measures and indicators to back our reasoning. The very next weekend, I decided to research on common macro-economical and social measures. In this article, I want to share my findings and learning with you.

This article is about key macroeconomic indicators.

Aim

This article focuses on the most important indicators that are used to compare countries. The knowledge of these measures can help management, analysts, researchers and scientists in forming better calculated decisions. It can also help us in presenting our reasoning better.

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Important Measures

This section provides an overview on most common used indicators:

1. Growth Domestic Product (GDP)

GDP is the most important and widely used macroeconomic indicator. GDP informs us about production and buying power of a country. It is the sum of consumption (food, gas, medical), government (public offices, military), investments (households, business investment) and net exports of a country. Net exports is the difference between exports and imports of a country. We can find GDP trend over time to assess how a country is performing, whether government policies are successful and how healthy its people are. GDP is expressed in the currency of the country.

Higher the GDP, more the country produces.

Top 3 Countries (highest GDP values): United States, China and Japan.

2. Growth Domestic Product Per Capita (GDP Per Capita)

Although GDP is a simple yet powerful indicator, it does not help us understand the average amount of money each person makes in a country. GDP can grow by 1% yearly but if the population is growing by 10% each year then on average each person is producing less over time. GDP per capita can help us assess whether people living in the country are getting wealthier. It is calculated by dividing GDP by total population of a country. GDP per capita can help us in finding average living standards and economic well being of countries.

Higher the GDP Per Capita, wealthier the people of a country are.

Top 3 Countries (Highest GDP Per Capita values): Luxembourg, Switzerland and Iceland.

3. Growth Domestic Product Per Capital On Purchasing Power Parity (GDP Per Capita On PPP)

This indicator is a further improvement on GDP Per Capita measure. The issue with GDP and GDP per capita is that they are expressed in the currency of the country. Goods and services have a different cost in different countries. For example, labour is cheaper in South Asian countries when compared to countries in Europe. GDP per capita on PPP is computed by converting GDP per capita to a common currency. Exchange rates of different countries are taken into account to express the values of the indicator in one common currency. GDP per capita on PPP is usually expressed in dollars. As a result, it can help us compare economical situations of a country better.

Higher the GDP Per Capita On PPP, wealthier the country.

Top 3 Countries (Highest GDP Per Capita On PPP values): Qatar, Macao and Luxembourg.

4. Income Inequality Using GINI Coefficient

GINI coefficients can be used to determine inequality of income in a population. It can help us understand well-being of poor people in a country. Income inequality can also help us assess dispersion of money in the country. GINI coeffient ranges from 0 to 1 where 0 indicates perfect equality in the country.

Lower the income inequality GINI ratio, better distributed country income is.

Top 3 Countries (Lowest GINI Coefficient Ratios): Ukraine, Slovenia and Norway.

5. Foreign Exchange Reserves

Countries can print their money but it increases inflation in the country. Although inflation can increase GDP but it decreases overall well-being of people in the country. As a result, money in country’s domestic currency is considered liability. Foreign Exchange reserves is the amount of money a country has in foreign currency such as in USD or Euros. Usually country’s central bank holds the foreign exchange reserves. Foreign currencies are considered more liquid than country’s domestic currency. Therefore foreign reserves are used to pay country liabilities. Countries with larger foreign exchange reserves are considered safe as foreign currency can be easily converted to pay off debts. Foreign reserves also help in importing goods and services from foreign countries. Foreign reserves include foreign banknotes, deposits etc.

Larger the foreign reserves, better economical state a country is in.

Top 3 Countries (Highest Foreign Exchange Reserves): China, Japan and Switzerland.

6. Foreign Exchange Debt

A country can owe loans to other countries or institutions within the country. The amount of outstanding loans are known as foreign exchange debts. Foreign exchange reserves along with foreign exchange debt is used to determine foreign debt burden on a country and how likely and easily it is to import products at time of trouble. Low foreign exchange debt is usually a sign of an improved fiscal management. Increasing foreign exchange debt is usually a negative sign for future of a country.

Lower the debt, better economical state a country is in.

Top 3 Countries (Highest Foreign Exchange Debt): United States, United Kingdom and France.

7. Corruption Perceptions Index (CPI)

Foreign and domestic investors invest in a country where they can get better returns without taking larger risks. A number of opinion based surveys and assessments are carried out to measure corruption index in a country. It helps investors understand how power is misused in a country and whether a country is safe for their investments. It is important for countries and public offices to be transparent and to enforce law to increase trust for investors. Corruption index is also negatively correlated to financial transparency in the country.

Larger the CPI, safer the country for your investment and more likely the country is to grow economically.

Top 3 Countries (Lowest CPI values): Denmark, New Zealand and Finland.

8. Unemployment Rate

Unemployment rate is the percentage of people who are unemployed from the number of people who can be employed. Employment rate can be used to determine whether a country is economically stronger, if its people are doing business and providing services, whether there are opportunities and new businesses being developed. Higher employment rate increases liquidity of money. When a large population is employed then people buy more goods, taxes are collected for a larger population which helps the country, new factories and service providers are built to serve the large population of employed individuals and overall, economical situation of a country increases.

Lower the unemployment rate, better it is for the country.

Top 3 Countries (Lowest unemployment rates): Qatar, Cambodia and Niger.

9. Inflation Rate

Inflation rate is the rate at which the price of goods and products have increased in a country. It is measured periodically. Inflation rate is calculated by pricing a large number of common goods and services in a country and then taking the weighted average of them. Government issues bonds to investors to raise its reserves. When inflation is high, interest rate increases and value of the bonds decreases. As a result, inflation rate can impact GDP Per Capita On PPP, foreign reserves and debts of a country. Additionally, when price of goods is expensive, people tend to spend less on recreational activities. As a consequence, overall well-being of a country decreases.

Lower the inflation rate, better for the people in general

Top 3 Countries (lowest inflation rates): Northern Mariana Islands, Andorra and Soloman Islands.

10. Literacy Rate

Literacy rate is the percentage of people who can read and write over total number of people in a country above the age when they can read and study e.g. 7 years old . I wanted to mention literacy rate indicator because it can impact long term economical situation of a country. Literacy rate also impacts skills of a population along with its employment rate. Richer and stable countries tend to have higher literacy rates.

Higher the literacy rate, more educated the population in a country, more the inventions, opportunities and greater the economical situation over time.

Top 3 Countries (highest literacy rates): Andorra, Azerbaijan and Serbia

11. Human Development Index (HDI)

Human development index indicator measures how much a government of a country is spending on social and economical development of its people. Life expectancy of a country along with education and income per capita are used to derive human development index. As a result, the three factors can influence the index. Countries with higher HDI attracts visitors and people tend to live their for long term.

Higher HDI indicates that the people of the country are better off are likely to grow socially and economically.

Top 3 Countries (highest HDI): Iceland, Japan and Norway.

Summary

It is useful to understand macroeconomic indicators that are used to compare and asses economical and development situations of countries. This article highlighted and provided an overview of the most important indicators.

These rates can also be collected over time to produce trend analysis on how a country is going to perform in the future.

Please let me know your feedback.