Gross Domestic Product (GDP) measures the dollar value of the final goods and services produced in a country. Changes in GDP are the most widely used indicator of a country’s overall economic health. There four components of GDP:
- Consumption of goods and services: This includes household spending on goods (appliances, food, clothing, housing) and services (health care, insurance, haircuts).
- Government spending: This includes spending on goods and services such as roads, bridges, schools, national parks, and national defense by all levels of government (federal, state, and local).
- Business investment: This includes spending on capital goods by businesses such as factories, office buildings, machines, and vehicles. It also includes spending on research and development (R&D).
- Net exports: This represents the dollar value of a country’s exports minus the value of its imports. Net exports are positive if a country imports less than it exports.
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Dividing a country’s GDP by its population is a common way to measure the average level of material affluence in that country. Per capita GDP is synonymous with notions of “wealth,” “well off,” “rich,” or “prosperous.” There is enormous variation in GDP per capita across countries. The wealthiest nations in North America, Europe, the Middle East and Oceania have per capita GDP in the range of $40,000 to $60,000 per person. Many countries that are concentrated in Central and South America, sub-Saharan Africa, and South Asia are characterized as poor because they have per capita GDP in the $1,000 to $6,000 range.
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Goods and services do not miraculously appear on store shelves or in Amazon warehouses. Energy is used along with other inputs to transform natural resources into goods and services. It is not surprising therefore that there is a general positive relationship between energy use per capita and GDP per capita. That is, countries that we consider rich use more energy per person than their less rich counterparts. Countries with high levels of affluence generally use the largest quantities of energy per person (United States, Canada, the EU, Japan, Australia, some oil-rich Middle East countries).
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China uses the largest quantity of energy and is the most populous nation, and it has the second largest economy after the United States as measured by GDP. But when energy use and GDP are scaled by population, China ranks 55th out of 178 countries in terms of energy use per person, and 77th in GDP per person.
The animation reveals an important phenomena of the past half century. Several large, low income countries such as India and China experienced significant increases in affluence that were accompanied by increases in energy use per capita. Those countries move diagonally upwards in the visualization. On the other hand, high income countries in Europe exhibit much slower rates of growth in affluence, which generally occur with little or no increase in energy use per capita.
“Affluence is not destiny” when it comes to energy use per person. Denmark and Iceland have similar levels of affluence, but the average Dane uses 80 percent less energy than the average Icelander. The average Chinese and Irish use similar levels of energy, but Ireland’s GDP per capita is nearly six times that of China. One takeaway is that the consumption of goods and services is an important determinant of energy use, but other factors are also important. These include structure of the economy, geography and climate, lifestyle, public policy, among other factors.