Main Paper, Economic Policy Paper no. 3

Short Paper, Economics Department Policy Note

Bloomberg article

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The next 50 years will see major changes in country shares in world GDP.

On the basis of 2005 purchasing power parities (PPPs), China is projected to surpass the Euro Area in a year or so and the United States in a few more years, to become the largest economy in the world, and India is projected to surpass Japan in the next year or two and the Euro area in about 20 years.

The faster growth rates of China and India imply that their combined GDP will exceed that of the major seven (G7) OECD economies by around 2025 and by 2060 it will be more than 1½ times larger, whereas in 2010 China and India accounted for less than one half of G7 GDP. Strikingly, the combined GDP of these two countries will be larger than that of the entire OECD area, based on today’s membership, in 2060, while it currently amounts to only one-third of it.

Such changes in shares of world GDP will be matched by a tendency of GDP per capita to converge across countries, which however will still leave significant gaps in living standards between advanced and emerging economies. 

Over the next half century, the unweighted average of GDP per capita (in 2005 PPP terms), is predicted to grow by roughly 3% annually in the non-OECD area, as against 1.7% in the OECD area. As a result, GDP per capita in the poorest economies will (in 2011) more than quadruple (in 2005 PPP terms), whereas it will only double in the richest economies.

China and India will experience more than a seven-fold increase of their income per capita by 2060. The extent of the catch-up is more pronounced in China reflecting the momentum of particularly strong productivity growth and rising capital intensity over the last decade. This will bring China 25% above the current (2011) income level of the United States, while income per capita in India will reach only around half the current US level.

Despite this fast growth among “catching-up” countries, the rankings of GDP per capita in 2011 and 2060 are projected to remain very similar. Even though differences in productivity and skills are reduced, remaining differences in these factors still explain a significant share of gaps in living standards in 2060.

Additionally, in a few European OECD countries and some emerging economies differences in labour input will also continue to explain a sizeable share of the remaining income gaps. Indeed, for some European countries, where ageing is more pronounced and/or older-age participation rates are low, these factors are enough to cause a widening in the income gap with the United States, despite continued convergence in productivity and skills levels.