Question

Why large population decreases GDP per capita ? And what is the relation between Real GDP and GDP per capita ?

Answer 1

In particular, some GDP-per-capita = GDP / population, see population in the denominator, and thus find a negative relationship - are wrong!

See, the GDP, or aggregate output of a country, are generated when we combine labor and capital in a productive way. More population means more labor force and thus higher GDP.

* The catch is in the volume of capital. All the factories, roads, buildings, machinery. Capital has to be built up, saved over many years. A country with very fast population growth will find it difficult to save up enough capital for the next larger generation. The absolute volume of capital will keep growing, but capital-per-capita will fall. Thus each new worker will have less capital to work with, compared with someone from another country. Because of the low capital the workers will be less productive and GDP per capita will be lower.

* Caveat: all this is true only when we compare two otherwise identical countries, differing only in the population growth rate. In the real world you can find countries with quickly expanding populations that are more successful than their neighbors - but their saving rates, education systems, quality of governance or natural resources might differ.

* Caveat 2: the above is true for countries with constant population growth. Things get much different when the natality changes suddenly. E.g. if a country with many young prople suddenly slows down its natality, you get something called a demographic dividend for a generation or two. You might have a vibrant economy with many enterprising young prople and very little costs in pension systems (few old people), healthcare (again, few old people) and education systems (fewer children than previously)

Here is a rule of thumb to help in grasping the practical differences between GDP Nominal and GDP PPP.

GDP is gross domestic product, the total economic output of a country, i.e., the amount of money a country makes. GDP per capita is the total output divided by the number of people in the population, so you can get a figure of the average output of each person, i.e., the average amount of money each person makes.

* The two most common ways to measure GDP per capita are nominal and purchasing power parity (abbreviated PPP). Nominal is an attempt at an absolute measure, a sort of immovable standard that remains the same from country to country. It is the original concept of GDP. In contrast, PPP is an attempt at a relative measure, taking factors of each country into consideration in order to put a number on a person’s standard of living within that country.

Now, that explanation is a good start I suppose, but it is rather vague. That’s where most explanations stop, so let me put it in more concrete terms that will allow you to easily remember the difference.

A rule of thumb for understanding GDP’s PPP and nominal is that PPP is how much of a local good (like real estate, labor, or locally grown produce) a person can buy in their country, and nominal is roughly how much of an internationally traded good (diamonds, DVD players, Snickers bars) a person can buy in their country.