The New Zealand Institute
| Grade | NZ Rank | Trend | Latest Value | 2015 Target | |
|---|---|---|---|---|---|
| C | 22nd of 34 | Equal | $42,438 | 53,000 | Incomes below OECD average |
GDP (Gross Domestic Product) is a measure of a country’s economic output and is the value of all final goods and services officially made within the borders of a country in a year. Dividing a country’s GDP by its population results in a per capita measure that indicates the value of production per person. This per person, or per capita, value indicates the ability of those people and their country to afford the goods and services they need and want, including spending on public systems such as education, health, welfare, security and environmental protection.
Comparing New Zealand’s GDP per capita with other countries is important because relative economic prosperity affects where friends and family will choose to live, work and bring up their children, and the ability to retain and attract talented people and business opportunities. Financially successful people and businesses spend money and support economic activity which results in an overall higher standard of living.
GDP per capita should not be used in isolation when assessing the progress of a country as factors that contribute to an increase are not always positive for a society overall. For example money spent on prisons and disaster recovery will lift GDP.
Until the 1960s New Zealand had one of the highest levels of GDP per capita in the world. From 1970 to 1990 GDP per capita declined steadily and by the early 1990s New Zealand was about 10% below the OECD average.
As Figure 1 shows, New Zealand’s real GDP per capita increased steadily from 1992 until the recession which began in the March 2008 quarter. Statistics New Zealand’s data shows New Zealand’s real GDP per capita declined in the two years following the March 2008 year. In the March 2011 year it rose slightly but remains lower than in 2008.
Figure 2 shows the sources of this growth, breaking the GDP per capita data into its components. In the top middle chart, the real GDP per hour worked shows a slow but steady growth since 1990 of just over 1% per year, with a total increase of about 20%. GDP per hour worked is also referred to as labour productivity, which is another measure in the NZahead report card. Growth in GDP per hour worked has contributed two-thirds of the growth in GDP per capita since 1990.
The hours worked per capita have been more variable. Hours per capita increased at about half the rate that GDP per hour has since 1990, and contributes about one-third of the increase in GDP per capita.
Moving to the charts on the far right of Figure 2, the bottom chart shows that hours per worker decreased from 1990 to 2010. But that decrease was more than offset by the increased number of workers per capita (participation rate) resulting in the overall increase in hours per capita. Increases in GDP per capita result from growing one or more of these drivers.
The third figure shows that despite improvements in GDP per capita from 1992 to 2007, New Zealand is ranked close to the bottom third of OECD countries; 22nd out of 34.
Figure 4 shows that New Zealand has remained about 10% below OECD average income levels for the last two decades. That was an improvement over the previous two decades when New Zealanders’ income levels slid steadily relative to the average OECD income. New Zealand does not compare well against income levels achieved in Australia, which has managed to maintain a GDP per capita about 25% above the OECD average.
Government established six priority improvement areas to achieve its goal of matching Australia’s GDP per capita by 2025:
Government has said it will continue to focus the economy towards savings, exports and productive industries, and away from government and consumer spending. It wants to raise the competitiveness of our exporters, lift business confidence, and increase jobs. Budget 2010 forecast 170,000 new jobs over the next four years, and quarterly figures from June 2010 to June 2011 showed the number employed rose by 43,000 with a drop in the rate of unemployment from 6.9 to 6.5%.
New Zealand’s workers per capita and hours per worker prior to the recession were in line with other OECD countries. Labour productivity is the major source of New Zealand’s low GDP per capita rank and provides the best opportunity for improvement. To lift GDP per capita and improve New Zealand’s position relative to the OECD average, the most important area to focus on is increasing the productivity of each hour worked: in essence, working smarter, not harder. Strategies to lift productivity are proposed in the New Zealand Institute’s publication, ‘A goal is not a strategy’ (p.4):
Despite a low GDP per capita ranking and disadvantages of size and distance, since the early 1990s New Zealand’s position relative to the OECD average has remained relatively stable.
The New Zealand Government has the goal of lifting GDP per capita and is developing policies and making resource commitments. However GDP per capita growth remains well below the rate required to match Australia by 2025.
Given that performance and the average 2010 GDP per capita result compared to OECD countries, the grade of C remains.
The 2015 target in real 2010 New Zealand dollars is based on the Government’s goal of matching Australia’s GDP per capita in 2025. The 2015 target has been calculated assuming Australia’s GDP per capita grows at the same rate as it did over the last ten years. To match Australia’s projected GDP per capita in 2025 New Zealand will need to achieve straight-line growth of 4.5% per annum, giving it a target GDP per capita of $53,000 in 2015.
GDP is the country’s income earned from production in New Zealand. It includes income from production carried out by New Zealanders and by foreign firms operating within New Zealand. This information is collected by Statistics New Zealand as part of the Economic Indicators National Accounts series available at http://www.stats.govt.nz/browse_for_stats/economic_indicators/GDP.aspx.
Real GDP per capita is GDP expressed in constant prices i.e. in the dollar values of a particular year, which is known as the base period divided by population. Real GDP is also defined as nominal GDP (in current dollar prices) after adjusting for inflation.
For the purpose of international comparisons, GDP per capita is converted to a measure of purchasing power (adjusting for different price levels and exchange rates) to allow comparison across countries. The purchasing power values are labelled PPP (Purchasing Power Parity).
For further diagnosis of the causes of New Zealand’s weak economic growth, and specific policy proposals, refer to the Institute’s website http://nzinstitute.org/.
Figures 1, 2, 3 & 4: The Conference Board (2011). Total Economy Database, retrieved 23 February 2011 from http://www.conference-board.org/data/economydatabase/.
Note: All data is Real GDP PPP expressed in 2010 $US and converted to 2010 $NZ using the exchange rate of 0.7215 as retrieved from the Reserve Bank of New Zealand historical series at http://www.rbnz.govt.nz/. For Figure 3, the average is an unweighted average of 34 OECD countries.
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