New Measure of Economic Efficiency

Yesterday morning I played around with some statistics in pursuit of an economic efficiency rating that could be used to compare two economies to one another.  What I have come up with is simple and, hopefully, compelling.

You could evaluate the continents of the planet just by sheer economic output, or total 2010 gross domestic product (GDP):

1. Europe: $19,920 billion; 32.9% of total
2. North America: $17,503 billion; 28.9% of total
3. Asia: $16,774 billion; 27.7% of total
4. South America: $3,990 billion; 6.6% of total
5. Africa: $1,184 billion; 2.0% of total
6. Australia: $1,220 billion; 2.0% of total

By this measure you can see that as a continent Europe is the world’s leading economy, accounting for almost a third of the world’s economy.

Total economic output is nice, but conceivably you could just exhaust your resources to generate gross domestic product.   So what about productive use of a nation’s resources?  Since all resources, except for imagination, ultimately come from the land or near shore fishing, what about 2010 GDP per total continental area in square miles?  Here is what I found:

1. Europe: $19,920 billion GDP ÷ 3.837 million square miles = $5,191,556 GDP per square mile
2. North America: $17,503 billion GDP ÷ 9.365 million square miles = $1,868,980 GDP per square mile
3. Asia: $16,774 billion GDP ÷ 17.212 million square miles = $974,553 GDP per square mile
4. South America: $3,990 billion GDP ÷ 6.880 million square miles = $579,942 GDP per square mile
5. Australia: $1,220 billion GDP ÷ 2.968 million square miles = $411,051 GDP per square mile
6. Africa: $1,184 billion GDP ÷ 11.608 million square miles = $101,999 GDP per square mile

From the above data you can see that the Europeans overwhelmingly make the most productive use of their land.  In fact, they make productive use of their land to the tune of 2.8x greater than the number two continent, North America.  Further, the Europeans are 50.9x (!) more efficient than Africa even though Africa is 3.0x larger, and therefore potentially has more resources than Europe.

To me this is a truly stunning result.  Not that I didn’t know that the European economy made efficient use of its land, but that it was the highest in the world and by a large margin.

But the above data are not enough.  Why?  Because land is not the only resource that an economy has, it also has people.  Within those people is the imagination needed to create, invent and innovate to make more productive use of a continent’s resources.  So what about total output of people?  That is, what about the ability of a continent to create people, or what is its total population?

1. Asia: 3,879 million; 59.9% of total
2. Africa: 922.011 million; 14.2% of total
3. Europe: 731.000 million; 11.3% of total
4. North America: 528.721 million; 8.2% of total
5. South America: 382.000 million; 5.9% of total
6. Australia: 31.260 million; 0.5% of total

I don’t think that there are any surprises here in terms of population.  I don’t think it’s any surprise to you either that I don’t consider this to be a very effective measure of how efficient an economy is at using its resources.  However, with the pieces of data that we have gathered so far we can create a measure that I think is very interesting.

For example, what about taking a continent’s total % of worldwide GDP and comparing it to its total % of land mass?  A sort of “how much bang for the land buck” measure.

1. Europe: 32.9% of total GDP ÷ 6.7% of total land mass = 491.0% efficiency
2. North America: 28.9% of total GDP ÷ 16.3% of total land mass = 176.8% efficiency
3. Asia: 27.7% of total GDP ÷ 30.0% of total land mass = 92.2% efficiency
4. South America: 6.6% of total GDP ÷ 12.0% of total land mass = 54.9% efficiency
5. Australia: 2.0% of total GDP ÷ 5.2% of total land mass = 38.9% efficiency
6. Africa: 2.0% of total GDP ÷ 20.3% of total land mass = 9.6% efficiency

This rank ordering is not any different than the GDP per square mile figure above.  But I think that there is additional information gleaned from the efficiency figure.  Any number above 100% means that a nation is getting very productive use from its resources.  Anything less than 100% indicates that a nation has the capacity to improve its economy by making greater use of its resources (solar arrays in the Australian outback, for example).

But what about the productive output of the people; a ranking that compares a continent’s share of total gross domestic product to its total share of the population?

1. Australia: 2.0% of total GDP ÷ 0.5% of total population = 417.0% efficiency
2. North America: 28.9% of total GDP ÷ 8.2% of total population = 353.7% efficiency
3. Europe: 32.9% of total GDP ÷ 11.3% of total population = 291.2% efficiency
4. South America: 6.6% of total GDP ÷ 5.9% of total population =  111.6% efficiency
5. Asia: 27.7% of total GDP ÷ 59.9% of total population = 46.2% efficiency
6. Africa: 2.0% of total GDP ÷ 14.2% of total population = 13.7% efficiency

This is another way of stating that the Australians have the most productive people on the planet.  What about an overarching, grand efficiency rating; some sort of weighted average?

I think it would depend on a bit of subjectivity.  That is, one could choose to weight one of these efficiency ratings over the other.  For example, if you felt that the first measure, land efficiency, was actually a measure of how much an economy taxed its natural resources, then you might weight the first measure lower than the first.

Rather than debate the merits of the weightings, why not just equal weight both figures by taking a normal average?

1. Europe: 391.1% average efficiency
2. North America: 265.2% average efficiency
3. Australia: 227.9% average efficiency
4. South America: 83.2% average efficiency
5. Asia: 69.2% average efficiency
6. Africa: 11.7% average efficiency

For me the above results are very surprising.  After all, in the United States you hear very frequently about the inferiority of the European economy from your college education onwards.  Yet, the Europeans, as a continent, make very productive use of their resources.  In fact, its obvious that North America, as a continent, has some catching up to do, especially on the making productive use of the land efficiency.

I also think that it is surprising to see that Asia lags South America in terms of efficiency.  It has the largest land mass, largest population, and largest population density yet it lags South America in terms of resource efficiency.

How could you use these figures as an investor?  If you were looking to invest in a particular economy you could see that Africa certainly, overwhelmingly has the most opportunity.  You know that it neither uses its land or its people efficiently.  That might lead you to evaluate why that is the case and whether or not there are any mechanisms in place to change that state of affairs.

You might also like to invest in a place where the average efficiency was just below 100%, like South America.  You might conclude that’s an economy right on the cusp of elevating itself.  But you might also discover that there are reasons for why South America has not been able to raise itself up above 100% efficiency.

I hope that this is food for thought going forward!

Jason