Economist explains why Europeans are getting poorer… and happier

Summary

This video script discusses the misleading narrative of Europeans becoming poorer compared to Americans, as suggested by GDP in dollar terms. It explains that while European incomes may have stagnated post-2008, the use of purchasing power parity (PPP) shows a different story, with Europeans maintaining their standard of living. The script challenges the focus on dollar GDP, emphasizing the importance of non-tradable goods and services in Europe's economy, and suggests that concerns over Europe's economic decline are more about global perspective and international trade.

Takeaways

• 📈 Post-WWII, European incomes were catching up to American incomes in dollar terms, but this trend changed after the 2008 crisis.
• 💰 European incomes stagnated while American incomes continued to rise, leading to reports of Europeans getting poorer.
• 🔍 A report by economist Mario Draghi suggests Europeans are 20% less productive compared to Americans.
• 🌐 Economic stagnation threatens Europe's ability to invest in aging population and security.
• 🤔 Despite the GDP per capita differences, Europeans' quality of life metrics like life expectancy and happiness do not reflect a decline.
• 💡 GDP in dollar terms is misleading for comparing European and American wealth due to the high percentage of non-tradable goods and services.
• 🌍 For large economic blocs, most goods and services are non-tradable, making dollar GDP a less useful comparison metric.
• 💸 Purchasing Power Parity (PPP) is a more accurate way to compare living standards within large regions like Europe and the US.
• 💵 The euro has lost value against the dollar since 2008, despite lower inflation and higher productivity in Europe.
• 🌐 Europeans have not felt poorer because most of their purchases are non-traded goods and services, not affected by the dollar exchange rate.
• 🏛️ Financial media and politicians focus on dollar GDP, which is important for international trade and investment, but does not reflect domestic economic health.

Q & A

What trend in European and American incomes is depicted in the graph mentioned in the script?

The graph shows that after the Second World War, the income of the average European has gotten closer to that of the average American in dollar terms, but after the 2008 crisis, European incomes stagnated while American incomes continued to rise.

What does Mario Draghi's report suggest is the main problem contributing to the economic stagnation in Europe?

Mario Draghi's report claims that Europeans have become 20% less productive compared to Americans, which is the main problem contributing to Europe's economic stagnation.

How does the script suggest that GDP per person correlates with quality of life metrics?

The script suggests that GDP per person tends to correlate well with various quality of life metrics such as the Human Development Index, life expectancy at birth, and self-reported happiness.

What is the limitation of using GDP in US dollars to compare American and European incomes according to the script?

Using GDP in US dollars to compare American and European incomes is less useful because in large economic blocs like Europe and the US, only a small fraction of goods and services are actually traded across borders, and most of the GDP consists of non-tradable goods and services.

What is the difference between GDP measured in US dollars and purchasing power parity (PPP) GDP?

GDP measured in US dollars compares the value of all final goods and services produced in a country using the current exchange rate to US dollars, while PPP GDP compares the purchasing power that people have to buy goods and services in their own country, taking into account both tradable and non-tradable goods and services.

Why does the script suggest that the difference between US dollar GDP and PPP GDP matters?

The difference between US dollar GDP and PPP GDP matters because it reflects how they account for both prices and the exchange rate, which can affect the perceived wealth and economic strength of a country when compared internationally.

What could be a reason for the euro losing value to the US dollar despite higher inflation in the US, as mentioned in the script?

The script suggests that the euro losing value to the US dollar despite higher inflation in the US could be a reflection of fundamental US strength compared to Europe, such as its cheaper energy, younger population, and better business environment for future companies.

How does the script explain the discrepancy between the reported economic decline in Europe and the quality of life metrics?

The script explains that most Europeans have not felt poorer because they buy mostly non-traded goods and services from their continent, where they do not use US dollars. This is why quality of life metrics like the Human Development Index, life expectancy, and reported happiness in Europe are doing just fine despite the lower value GDP stagnating compared to the US since 2008.

What is the significance of the exchange rate between the euro and the US dollar in the context of the script?

The exchange rate between the euro and the US dollar is significant because it impacts how European incomes are perceived in dollar terms. The script notes that after 2008, the euro has lost value against the dollar, which contributes to the narrative of Europeans becoming poorer in dollar terms.

Why might financial newspapers and politicians be concerned about Europe's economic decline despite the script's argument that Europeans have not gotten poorer?

Financial newspapers and politicians might be concerned about Europe's economic decline because it affects Europe's international power and the ability to make investments in areas like energy imports, which are paid in US dollars. Additionally, they may be worried about Europe's place in a world that is becoming more hostile.