Effective GDP: A Cross‐Country Comparison

Fahd Rehman and Russel Cooper

The World Economy, 2023, vol. 46, issue 3, 619-652

Abstract: A large literature has developed around alternatives to gross domestic product (GDP) per capita for cross‐country comparisons of well‐being. Many of these studies point to non‐economic factors that affect well‐being but are not captured in the traditional GDP measure. With a comprehensive coverage of economies available through the World Bank's International Comparison Programme (ICP) databases at six‐yearly intervals, this paper utilises the ICP 2011 Purchasing Power Parity (PPP)‐based expenditures and builds upon it through an analysis of residuals from cross‐country Engel curve regressions. The methodology draws on the idea that patterns in Engel curve residuals can reveal inter alia previously unmeasured aspects of human well‐being such as optimism or pessimism. The paper demonstrates how a residual‐based model of Revealed Optimism/Pessimism can be neatly integrated with PPP‐based GDP to provide an extended measure of national well‐being, referred to here as ‘Effective GDP’. As a result, a wider disparity in well‐being across economies is revealed than could be discerned simply from the ICP data. The results suggest that, in 2011, Effective GDP extends traditional PPP‐based GDP estimates by around two per cent in the positive direction for apparently optimistic economies and as much as five per cent downwards for pessimistic ones.

Date: 2023
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