Howdy folks, and welcome to the Monthly Blip for July 2023.
Last week, I wrote about whether we are too negative on the UK - considering trends in GDP and median disposable income. Median disposable income is a nice metric because it shows we are growing the economy for the median person.
Let’s take a look back at some of that data, but this time incorporating the data for Ireland! We’ll start with median disposable income per capita - on a purchasing power parity basis - all relative to the UK:
The key takeaways are:
US disposable income is higher (no surprises there, and partly mitigated by lower levels of government services).
France, Germany (and now Ireland too in orange) seem to be doing similarly to the UK.
Poland is making strong progress.
Looking at median (not average!!!) income:
Could France, Germany, Ireland and the UK all be doing better in terms of growing median disposable income - YES!
Is the UK doing noticeably worse on this metric - NO!
Alright, let’s move on to comparing GDP and including Ireland, which is a little more tricky - as we’ll see.
Review or copy or comment on the spreadsheet here.
Where does Ireland stand in terms of GDP?
Ireland is towards the top of the wikipedia table of GDP per capita:
But there’s a big caveat!!!
Here is the income equation for Gross Domestic Product:
GDP = Compensation of Employees (Wages and Salaries) + Gross Operating Surplus (Profits) + Gross Mixed Income (Income from self-employment) + Taxes on Production and Imports - Subsidies
Some profits from the Irish economy contribute to GDP but flow outside the country. Gross National Income (GNI) adjusts for that effect. After that adjustment, Ireland is still doing well on the table for GNI per capita - ranking towards the top:
However, there’s yet another big caveat!!!
GNI is misleading for Ireland because of multinationals’ accounting.
Consider a multinational that moves patents to Ireland and starts attributing 10 billion Euro per year in gross profits to their Irish entity. If those 10 billion Euro in annual profits are largely unrelated to work done in Ireland (e.g. they are for services abroad), then it will look like there is 10 billion Euro extra in GDP, but this isn’t real production of anything in Ireland.
Gross national income won’t include this effect if dividends are distributed abroad by the Irish company (because GNI only includes net income earned by Irish residents/entities). However, if the profits are held in Ireland, and not sent out as dividends, then GNI might increase (because there is no outflow of dividends to counteract the inflow of profits).
So, Ireland came up with a third measure - modified Gross National Income (GNI*) -that accounts for effects like the above.
Irish GNI* is about 40% lower than headline GDP figures (see this piece interviewing Patrick Holohan, former central bank chief). Since GNI* is pretty specific to Ireland, it’s hard to find global tables of GNI*. One approximation is to look at the GDP tables and see where Irish GNI* falls in that table - since bigger countries don’t have big international effects like Ireland.
If you scroll up the GDP table, and calculate 60% of the $100,000 nominal Irish GDP reported by the World Bank, then Ireland drops to $60,000 - below the US and outside the top 10.
If you look at the GDP per capita table on a purchasing power parity (PPP) basis, which normalises (with pros and cons) for local costs, then Adjusting Ireland to 60% of this value [which is quite a loose thing to do], brings Irish GNI* to about $76,000 - just around where the US is, and just inside the top 10:
What matters more? GDP or GNI or GNI*?
Irish GNI is very roughly 80% of Irish GDP. Having a gap between GDP and GNI means some profits are going outside the country. While it sounds bad that the profits are leaving Ireland, this may be a narrow reading because:
Returning profits to foreign investors encourages them to continue and expand investing in Ireland.
For Irish companies to pay out net profits, there are often profits and wages created for other Irish companies and for Irish citizens earlier in the supply chain.
GNI* is about 60% of Irish GDP. The modifications to GNI are to adjust for the accounting of multinationals. The difference between GNI and GNI* isn’t real. So, having a gap between GNI and GNI* is perhaps worse than a gap between GDP and GNI.
The best metric for overall Irish economic growth is perhaps some some kind of GDP* metric:
Include GDP where profits go abroad (because it is still real Irish productivity), but
adjust it in the same way as for turning GNI into GNI* to get rid of multinational accounting effects.
In this scenario, Irish productive GDP would be roughly 80% of recorded GDP - perhaps around $80k using World Bank data for 2022, putting Ireland well into the top 10 and above the US.
Two metrics for thinking about the Irish Economy
A measure of overall economic growth: GDP* (GDP adjusted for multinational accounting effects).
A measure of whether all are benefiting: Median disposable income (PPP).
Of course there are many other metrics to think of, but these two aren’t a bad start.
Two caveats:
GNI vs GNI* gets into technical accounting - so let me know if you see any errors in my numbers or understanding.
Median disposable income is a nice metric at a high level, but I may be missing some nuance around the measurement of this quantity.
That’s it for this month, folks!