Since the purchasing power of the other country’s currency is twice that of the United States, we have to double their output in terms of the other country’s currency to make it comparable to US dollars. Purchasing power parity (PPP) is the term used to adjust the value of a nation’s output from its own currency into US dollars. Happily, such a calculation exists and is widely recognized in economic analysis. In this book, whenever we compare one nation’s output, or wealth, to that of another nation we will use the PPP adjustment to make the comparison.
The largest economies in the world are those that produce the most goods and services. The following are world leaders in terms of total economic output.
It’s easy to confuse size with wealth. The saying “size matters” doesn’t apply when referring to a nation’s wealth. China and India are two of the largest economies in the world. Neither is wealthy. These countries produce a lot of output, but each has over a billion people. Dividing a nation’s output by its population provides a more meaningful estimate of the wealth of its people.
Output per person, adjusted for PPP, is the most commonly accepted measure for international comparisons of wealth among different countries. It is also a nebulous concept. Few people can relate to it. What most people can relate to are wages or salaries.
For various reasons, it’s possible to use output per person as a rough approximation of the average annual wage in a country. The data appendix explains why this is so. Hence, whenever you see output per person for any country you can think of it as the average annual wage for the country. Some may prefer to consider the median wage (where there are as many workers earning more as earning less). Reducing the average wage by 20% can provide a rough estimate of the median worker’s annual wage.
With this background information we are ready to begin comparing the wealth of various nations.
The World’s Richest, Poorest & Middle Class Nations
I’ve been poor and I’ve been rich. Rich is better! — Beatrice Kaufman
In 2015, the following nations were the wealthiest in the world. Nations with fewer than roughly five million people and those where oil deposits account for a third or more of their wealth, were not included. With these criteria, Singapore is the wealthiest nation in the world while the United States is the wealthiest of the world’s largest countries. Workers in these two countries produce far more goods and services than workers in most other countries. As a result, the people in these countries have the highest living standards in the world.
In Norway oil accounts for anywhere from 10% to 25% of total output. Hence, at least some of their wealth is due to these natural resources.
In 2015, the world’s population was estimated to be 7.2 billion people. Roughly half of these people lived in countries where output per person was above $14,000. The other half lived in countries with output per person below this level. Hence, the world’s middle class countries are those with output per person in the vicinity of this level.
In sharp contrast to the extraordinary success of the world’s richest nations, and the mediocre performance of others, is the extreme poverty found in those nations where output per person is below these levels. For example, India’s 1.3 billion people live in a country where output per person is only half that of Peru. As poor as India is, there are many nations even worse off.
Abject poverty is the inability to earn enough for basic human needs, such as food, water, clothing, and shelter. Many economies perform so poorly they cannot meet the most basic needs of their people. The World Bank estimates there are roughly a billion people who suffer from conditions of abject poverty.
The International Monetary Fund lists the following nations among the poorest of the poor, defined by output per person.
Redistributing Wealth
The extreme difference in wealth between the wealthiest nations, where many live in luxurious surroundings, and the poorest nations, where billions literally starve, is extremely disturbing. Such inequality leads some to conclude those who live in wealthy countries enjoy their benefits at the expense of those who are less fortunate. Many believe social justice requires the redistribution of income from those who have to those in need.
We are called upon by God and our conscience to help those in need. The character of an individual is measured by the extent to which he or she voluntarily provides for the needs of others from their own resources. Such voluntary giving can relieve the suffering of certain needy individuals. However, there are simply too many aspects of poverty and too many poor people for redistribution of income to make a significant reduction in the world’s poverty.
For example, confiscating 20% of the yearly output from all those in our ten wealthiest countries and redistributing it among those in the bottom half of all nations, it would add only about $1,300 a year to their income. Some of the poor would temporarily have a windfall gain. However, as we will see in subsequent chapters, involuntary redistribution of income permanently reduces future output in successful countries. Ultimately, the reduction in wealth in these countries would reduce any future redistribution. Instead of reducing world poverty, involuntary income redistribution increases poverty.
If involuntary redistribution of wealth has any meaning, we must begin by identifying who should give their income to the poor. In other words, who are the rich? From a global standpoint, Mexico produced 35% more output per person in 2015 than the average middle class nation. And yet, Mexico has its own serious problems with poverty.
In the United States, the government classifies an individual as poor if their income is roughly $12,000 a year. A family of four is considered poor if their income is below roughly $24,000 a year. These income levels equate to the middle class or upper middle class in the rest of the world. To combat its relative poverty, the United States has more than eighty separate federal programs and spends a trillion dollars a year to help the poor.
While there are always issues about how efficient and effective government programs might be, taxpayers in the US (mainly upper income earners) already have a substantial amount of their income involuntarily taken from them for the purpose of helping those in need.
Resources and Need
Estimates from the World Bank show 13% of the world’s population, roughly a billion people, live on less than $2 a day. Even more discouraging are estimates showing half the world’s population, about 3.6 billion people are classified as truly poor. The problems even rich countries face attempting to help the poor in their own countries shows how redistribution, whether voluntary or involuntary, is simply incapable of making significant progress in reducing the world’s poverty.
Fortunately, there is a solution. Poverty can be significantly reduced by giving the poor the same opportunities as those in successful economies. The only practical solution to enhancing the wealth of nations is for poor countries to replicate the formula for success followed by wealthy nations.
The World Bank’s estimates of global poverty indicate this has been happening. In 1981, 44% of the world’s population lived under conditions of abject poverty, literally starving to death. The