GDP per capita: The most important number

Peter Josty is Executive Director of the Centre for Innovation Studies in Calgary. 

Every day we are exposed to all sorts of metrics comparing Canada with other countries.

There are economic indicators (GDP, inflation, foreign direct investment, economic freedom, exports and imports, unemployment, entrepreneurship); social ones (inequality, World Happiness Index, Human Development Index, social mobility); innovation ones (patents, R&D spending, Global Innovation Index); legal ones (Rule of Law index), and many more.

Which of these is the most important?

I would argue that Gross Domestic Product per capita is the single most important number. This measures how much the average person produces. The full definition, from the World Bank is: “Sustained economic growth increases average incomes and is strongly linked to poverty reduction. GDP per capita provides a basic measure of the value of output per person, which is an indirect indicator of per capita income. Growth in GDP and GDP per capita are considered broad measures of economic growth.”

Having a high per capita GDP indicates a high standard of living and provides resources to provide social services and deal with unexpected issues, and is a good indicator of the success of the overall economy. So how does Canada stack up by this metric?

According to an article in The Economist, in 2022 Canada’s GDP per capita in 2022 was US$54,966 USD. That ranks Canada as No. 13 globally. However, when you adjust that number for purchasing power parity, the GDP per capita moves to US$58,400 – which ranks Canada No. 22 globally.

Charting the trend in real GDP per capita

The graph below shows Canada’s real GDP per capita from 1981 to 2023. Over that time the trend has been to increase at about 1.7 per cent a year. However, starting around Q1 2015 the growth slowed below that trend line, and then fell further below the trend line during COVID.

Statistics Canada, in a report and under the headline: “Declines in gross domestic product per capita portend lower living standards,” noted that increases in GDP per capita can be driven by three factors:

• higher labour productivity (output per hour worked)
• higher work intensity (hours worked per job)
• a higher employment-to-population ratio

How does Canada compare with the U.S.?

The graph below shows that Canadian GDP per capita has declined as a percentage of U.S. GDP per capita since 1980.

The Organisation for Economic Cooperation and Development projects Canada will be the worst-performing economy among the 38 advanced economies over this decade, 2020 to 2030, as well as from 2030 to 2060, with the lowest growth in real GDP per capita. 

Canada’s current high rate of immigration depresses the GDP per capita in the short term. In 2023, the GDP grew by 1.5 per cent but population increased by 3.2 per cent. However, the academic literature overwhelmingly finds that immigration levels have a neutral or negligible overall impact on a country’s living standards as measured by labour productivity, real wages, the employment rate, the age structure of the population or, crucially, GDP per capita.

Pros and cons of GDP per capita as a metric

Although GDP per capita is the most important number it is far from perfect, and definitely doesn’t tell the whole story.

Pros:  As the Business Council of Alberta points out, a higher GDP per capita is usually associated with higher household income as well as often being associated with positive outcomes in a wide range of areas, such as better health, more education and even greater life satisfaction.

Cons: GDP per capita does not translate into the income of the typical person. It also doesn’t have much to say about income distribution or social mobility. For regions with capital-intensive industries, much of the value is created by those sectors. GDP per capita also says nothing about the environment.

Conclusion

GDP per capita may be the most important economic statistic, but it does not tell the whole story. In particular it says nothing about income inequality or the environment.  Nevertheless, it is a valuable measure of prosperity.

Canada’s GDP per capita growth rate has declined below its long-term trend for the last eight years and has declined significantly when compared with the U.S. since 1980. Projections for the next 20-30 years are bleak.

Much more policy attention needs to be given to raising productivity so as to increase our growth in GDP per capita and maintain our standard of living. A good start would be to create more incentives for firms to invest more in the technologies of tomorrow, such as artificial intelligence, quantum technology and synthetic biology.

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