> The problem is GDP is not even particularly a good proxy for the income of households (individuals). GDP is designed to measure how much value add is produced within domestic (territorial) boundaries. It usually does a fairly decent job of this, but it does not directly tell us about the household perspective, as in, the average level of real incomes or real consumption enjoyed residents of a country (a.k.a. “material living conditions“). Most importantly, it is an increasingly unreliable proxy for this concept.
Would someone care to explain how this works? What's the factor causing divergence between the two? Is it the proportion of GDP being returned to overseas investors? Or a mis-counting which includes GDP of US multinationals produced by workers overseas?
I (RCA) have been meaning to dedicate a blog post to this topic exclusively and quantify the root causes in considerable detail.
In short, yes, I believe globalization and, specifically, multinational corporations (affiliates of foreign owned corporations) are the primary cause. However, in regression terms, this has less to do with net income flows into the US than net income flows out of several small high GDP/person countries. The US is a very large, very rich country whereas many of these countries are much smaller so it doesn't take much to have outsize affects on them. Even if 100% of this ultimately accrues to the benefit of US households, (which I don't think is quite accurate) the effect in % terms is vastly different.
Although some of this can be directly observed as primary income flows in the current year national accounts (dividends, rent, etc), some of it shows up as gross savings or disposable income in the foreign affliates, i.e., it's equivalent to retained earnings. Over the past decade or two non-financial corporate savings have increased massively and these savings are largely uncorrelated with domestic (capital) investment, i.e., it's almost entirely financial and it's largely leaving these countries in the form of net lending. These things also influence the calculation of (GDP) PPPs and cause other headaches.
Of course, there are also other reasons why GDP misleads. For example, Luxembourg has a very large non-resident workforce. Something like 50% of their workers live in neighboring countries (varies year to year), meaning ~50% of aggregate employee compensation goes home (cross border) to Germany and the like. Then there are petro-states like Norway whose income flows are inherently temporary (finite amount of natural resources to extract) and highly volatile, meaning they can't consume out of their measured GDP like most other countries. They need to practice massive consumption smoothing if they don't want their standard of living to crash in the not too distant future.
Long story short, GDP was never intended to be an indicator of material wellbeing and the household perspective (consumption, disposable income) are better measured and more reliable. One might try to throw a bunch of variables in to counteract the many issues imposed by GDP as a proxy for the household perspective, but why bother?
~ RCA (sorry for typos, grammatical errors, etc... limited time to comment and would rather focus more effort on blog)
one example that I often heard being made is that natural disasters have a positive outcome to the GDP. Houses and communities get destroyed, people are objectively much worse off, but due to the money pumped in reconstruction the GDP grows more than if no disaster had happened.
Would someone care to explain how this works? What's the factor causing divergence between the two? Is it the proportion of GDP being returned to overseas investors? Or a mis-counting which includes GDP of US multinationals produced by workers overseas?