Monday, 16 July 2012

A bit more on the living standards

A very quick note on the living standards in Iceland and the question of how far they collapsed in 2008.

I implied that the answer to the question depends on whether one measures the wages in Iceland in foreign currencies (SDRs) or in the Icelandic krona. The ISK-denominated wages haven't crashed anything close to the SDR-denominated wages. So the question is: which one is a better measurement?

The fact of the matter is that it must be a personal matter. A family of four living in Iceland who never travels to foreign countries does not feel the pain of the krona collapse as much as the one who goes to Spain every summer.

And as almost always, there are politics behind which measurements you want to use. If you want to claim that living standards in Iceland have collapsed due to e.g. the wrong government policies, you pick the SDR-denominated wages. If not, you use the other figures. If you want to say that unemployment in Iceland is low at the moment, you compare it to Spain. If you want to say that unemployment in Iceland is high at the moment, you compare it to the historical average.

Anyway, I was looking for data for my PhD and came up with this comparison shown in the graph below. I must admit that I find it quite remarkable how the Gross National Product plummeted in the crash while the Gross Domestic Product only dipped a bit more than slightly.* And here comes another weird question: why is it so that US statistics use GNP so often while European stats use the GDP? Why isn't GDP or GNP used in all countries? Which one is "righter"?

GNP of Iceland dipped considerably more than the GDP. Which one is a better measurement of nation's living standards?

Then it is the comparison matter. How is Iceland doing in comparison to other economies? According to the Better Life Index by OECD we seem to be doing all right. Life in Iceland is not all too bad really, at least if you compare it to other countries. But if you want to say that life is horrible, you don't compare it other countries. You compare today's life with the credit-fuelled good times of 2007.

A screen shot from the Better Life Index website of OECD. Check out Iceland's figures here.

So what are we talking about again? How much living standards fell or how to define living standards?

Back to work, have to finish this thesis one day!

*For those of you who do not know: Gross National Product is the sum of value of all products and services made by the citizens of a country, no matter where they are in the world. Gross Domestic Product is however the sum of value of all products and services made within the borders of the country.

A car made in France by a German company is therefore a part of the GNP of Germany but part of the GDP of France.

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