Structure of GDP use in EU countries: relationship of indicators

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Alfred Nobel University

STRUCTURE OF GDP USE IN EU COUNTRIES: RELATIONSHIP OF INDICATORS

Anatolii Zadoia, Sc.D. in Economics, Full Professor, Head of the Global Economic Department, Alisa Mahdich Ph.D. in Economics, Associate Professor, Professor of the Global Economic Department, Oleksandr Zadoia Ph.D. in Economics, Associate Professor, Associate Professor of the Global Economic Department

Dnipro

Abstract

correlation gdp structure proportion

The article examines the relationship between indicators of the structure of GDP use, their proportions, and analyzes the likely relationship with the level of development in the EU countries. On the basis of official statistical data, a matrix of pairwise correlation coefficients was constructed for indicators of GDP calculation based on final consumption and indicators of economic growth for 25 EU countries (Ireland and Liechtenstein were excluded from the sample as atypical). In order to draw conclusions about the possibility of using the experience of building European models for Ukraine, the correlation matrix was divided separately for EU countries with GDP per capita greater than 25,000 euros and less than 25,000 euros. It was found that more developed countries have a smaller share of household final consumption in GDP and a very close negative correlation with the level of economic development. There is a different level of dependence between investments and economic growth: for developed countries, this indicator is much lower. Highly developed countries provide higher rates of economic growth not at the expense of investments, but at the expense of the development of foreign trade. Accordingly, taking into account the current realities and features of economic development, Ukraine needs to use a combination of models of developing countries and developed countries of the EU for an accelerated exit from the post-war crisis.

Keywords: GDP structure, investments, final household consumption, final government expenditures, exports, imports, economic model, pairwise correlation.

Statement of the problem

The gross domestic product indicator has been used to assess the state of the national economy for over 100 years. However, despite this, scientists constantly return to the analysis of its various aspects. This is due to a number of circumstances. First, the structure of social production is changing. Not only new products appear, but also new connections, new spheres of activity, which require consideration of these innovations in the GDP calculation methodology. Secondly, it is necessary to monitor new trends that are characteristic of structural shifts in GDP. Thirdly, some provisions of economic theory regarding the relationships between economic indicators and processes acquire a new meaning and do not always find empirical confirmation. Fourth, there are certain regional peculiarities in the formation of the GDP structure, which must be taken into account for forecasting the development of national economies. Therefore, the study of the structure of GDP and the relationship between its structural elements does not lose its relevance.

Analysis of recent research and publications

The economic literature of recent years is filled with studies related to the use of GDP to assess the wealth of society [1], features of GDP measurement through the use of additional indicators [2], reflection in the system of national accounts of the modern digitalization of the economy [3], the relationship between the structure of GDP and added value [4]. At the same time, the relationship between the structural elements of GDP and some other important indicators of the country's level of development remains overlooked. This is especially relevant for Ukraine, which is working on the search for a model of post-war economic development.

The article aims

The purpose of our research is to find the relationship between GDP utilization indicators in the EU member states and its quantitative measurement using correlation analysis.

Outline of the core material

According to the system of national accounts, gross domestic product by expenditure consists of consumption expenditure (which is divided into final government consumption and final household consumption), gross accumulation (investment) and net exports (as the difference between exports and imports). Since the listed elements are parts of one whole, naturally, a change in the part of one of them leads to a change in the part of the others.

Simple calculations show that in different countries the ratio between the components of GDP by expenditure is different. The following questions arise:

- what depends on the ratio of structural elements of GDP by expenses;

- are there any regularities in the formation of the structure;

- what cost structure should Ukraine take as a model on the way to the European Union;

- whether the cost structure is related to the level of development of the country and the dynamics of the national economy.

We will try to answer these questions in the course of our research.

As the information base of the study, data on the structure of GDP by expenditure of the member states of the European Union, provided by Eurostat [5] (Table 1), were taken. All indicators given in the Table 1 were calculated for 2021. Average annual GDP growth rates are calculated as the arithmetic average of growth rates for the period from 2012 to 2021.

Table 1

Raw data for analysis Calculated by the authors based on the Eurostat. Retrieved from https://ec.europa.eu/eurostat/data/database

The following designations are used in the study:

Xi - specific weight of investments in GDP, percentage;

X2 - specific weight of state final consumption in GDP, percentage;

Х3 - share of household final consumption in GDP, percentage;

X4 - share of exports in GDP, percentage;

X5 - specific weight of imports in GDP, percentage;

Хб - GDP per capita, euro;

X7 - average annual rates of GDP growth, percentages;

Xs - volumes of final household consumption per capita, euros.

The successful use of pairwise correlation to measure the degree of correlation of indicators, the formed base must be checked for homogeneity. As can be seen from the table, the two countries violate the homogeneity of the sample on a number of indicators. These are Ireland and Liechtenstein. In particular, the share of household final consumption in GDP and the ratio of exports and imports to GDP differ significantly from the indicators of other countries. Therefore, these two countries are excluded from the sample for further analysis. However, such a decision cannot affect the overall picture, since these countries are small and do not play a decisive role in shaping the overall picture of the European Union.

The calculation of the matrix of pairwise correlation coefficients for 25 EU countries is given in the table. 2. Its analysis allows us to draw several conclusions.

Table 2

Matrix of pairwise correlation coefficients (for 25 EU countries)

1. A negative value of the correlation coefficients of the specific weight of the final consumption of households in GDP (Х3) with all other indicators is observed.

And in most cases, the dependence is significant (correlation coefficient modulo more than 0.4). If with regard to investments and final state consumption, both the closeness of the connection and its direction are absolutely clear (because they are all parts of a single whole - GDP), then the connection with other indicators requires additional analysis.

2. The closest connection of the specific weight of the final consumption of households with the level of the country's development, which is measured by the GDP indicator per capita (-0.6432), draws attention. At first glance, this should contradict the generally accepted position that the standard of living in the country is evaluated precisely by the last indicator. In fact, it turns out that the higher the country's level of development, the smaller the share of individual consumption in GDP. However, everything falls into place when we pay attention to the relationship between GDP per capita and final government consumption: this relationship is unidirectional and quite close (the correlation coefficient is 0.7809). And although the pairwise correlation does not provide an answer to the question "What is the cause and what is the effect?", in our opinion, the revealed relationship can be interpreted as follows: countries with a higher level of development have the opportunity to ensure a high level of individual consumption with a lower specific consumption weight in GDP and allocate a growing share of public income to meet collective needs through state final consumption. This once again confirms the opinion that the role of the state in modern conditions is not decreasing, but, on the contrary, is increasing due to its taking on the functions of the organizer of the satisfaction of collective needs.

3. Research does not show the expected relationship between investment and economic growth rates (pairwise correlation coefficient is only 0.1791). This means that in modern conditions the role of investments as a factor of economic growth is significantly limited. New factors have appeared that require special research.

4. The only indicators that have a close relationship with the rate of economic growth are the specific weight of exports and imports of goods and services in GDP (correlation coefficients, respectively, 0.7096 and 0.7124). On the one hand, this may indicate that the growth of national production expands opportunities for interaction with the outside world, and on the other hand, that foreign economic activity becomes an important factor in accelerating economic growth.

At the same time, this conclusion should be used with caution when building a socio-economic model of post-war Ukraine. If you group EU countries by GDP per capita (more than 25,000 euros and less than 25,000 euros) and calculate the same indicators of pairwise correlation, you can see other relationships (Table 3 and Table 4).

Table 3

Matrix of pairwise correlation coefficients (for EU countries with GDP per capita of more than 25,000 euros)

Thus, for countries with a higher level of development, the closeness of the relationship between the rates of economic growth and the specific weight of exports and imports in GDP is extremely high (0.9132 and 0.8987, respectively). However, the pairwise correlation of these indicators for countries with a lower level of development ceases to be significant (correlation coefficients 0.3791 and 0.3725). On the contrary, for less developed countries, there is a strengthening of the connection between economic dynamics and the specific weight of investments in GDP to the level of "substantial". The correlation coefficient for this pair reaches 5397. Investment is likely to retain its essential link with economic dynamics for less developed countries, gradually losing its role as the country reaches a certain level of development. Therefore, for Ukraine, this factor of economic growth cannot be ignored in any way, combining it with new opportunities opened up by international economic relations.

Table 4

Matrix of pairwise correlation coefficients (for EU countries with GDP per capita below 25,000 euros)

Another feature of countries with a lower level of economic development is revealed when analyzing the relationship between the specific weight of final state consumption in GDP and the level of economic development. For more developed countries, this relationship increases even more (correlation coefficient reaches 0.7951), while for less developed countries it loses signs of significance (correlation coefficient drops to 0.1762). This is again a confirmation of the previous conclusion about shifting the emphasis in the state's activities to the satisfaction of collective needs due to an increase in final state consumption.

Most often, GDP per capita is used as an indicator used to characterize the standard of living in a particular country. At the same time, there are elements in the GDP structure that are not directly related to the standard of living. An example can be investments. In addition, a country can have both a positive and a negative value of the net export indicator, which affects the level of domestic consumption in different ways. The excess of exports over imports essentially means that part of the product created in the country and sold abroad is not compensated by imported products, which actually reduces domestic consumption. On the contrary, when imports exceed exports, it means that domestic consumption is growing at its expense.

Fig. 1 shows that both the EU as a whole and most of its member countries have a positive value of net exports. And only two countries (Greece and Romania) have a more or less significant excess of imports over exports (1.7 and 4.1% of GDP). In three more countries, this excess is within 1% of GDP (France, Croatia, Latvia). It should be noted that all these countries (with the exception of France) in terms of GDP per capita within the EU rank in the third dozen.

In general, European EU member states are characterized by "underconsumption" compared to the opportunities created by GDP. However, for most of them (to be precise, 15 countries belonged to this group in 2021) net exports do not exceed 5% of GDP. However, there are 7 countries for which net exports are quite significant in relation to GDP. Luxembourg has the highest rate - 30.8%. And this is not accidental. This country adheres to the intermediary model in the world trade in goods and services, therefore, as it was seen from the Table 1, has extremely high indicators of the ratio of exports and imports to GDP.

Fig. 1 Ratio export, import and net export to GDP (per cents)

The second country in terms of the relative indicator of net exports is Malta (17.7% of GDP). Its economic model is similar to the previous one. A significant part of foreign trade is re-export. And essentially, net exports are those commission payments that the country receives for its intermediary services. Small volumes of GDP related to the size of the country make the indicator of relative exports so high.

The Netherlands also focuses on the provision of intermediary services. According to some researchers, "the Netherlands is actually one of the world's largest offshore jurisdictions" [6]. Despite the significant excess of the absolute value of net exports compared to Luxembourg and Malta, the relative figure of net exports in this country is 9.8% due to the large volumes of this country's GDP.

Taking into account these circumstances, it will be appropriate to compare the ratings of EU member states by indicators of GDP per capita and final household consumption per capita (Table 4).

Only thanks to a significant increase in GDP per capita compared to other countries, Luxembourg retained its first position in the ranking of countries based on the indicator of household final consumption per capita. However, the gap has narrowed significantly: while GDP per capita in Luxembourg is almost twice that of Denmark, the final consumption of Luxembourg households is only 30% greater than that of Denmark. Malta and the Netherlands lost 4 and 3 positions, respectively. Also, a significant deterioration of the rating is observed for Ireland (-7 positions) and the Czech Republic (-5 positions). Countries such as Germany, Portugal and Greece improved their rating positions the most ( - 3-4 positions).

Table 4

Rankings of EU countries by indicators of GDP per capita and final household consumiption per capital

* Calculated by the authors based on the Eurostat. Retrieved from https://ec.europa.eu/eurostat/data/database

Conclusions

Thus, the analysis of indicators of the structure of the use of GDP of the EU member states and the study of the interrelationships between them allows us to formulate a number of conclusions.

1. Despite being part of a highly integrated union and using similar market business models, EU member states have significant differences in the structure of GDP use. Thus, the specific weight of investments in GDP ranges from 13.3% in Greece to 29.0% in Estonia; the share of public final consumption varies from 12.2% in Ireland to 26.3% in the Netherlands; the share of final household consumption is lowest in Ireland (23.6%) and highest in Greece (67.9%). The amplitude of fluctuations in the ratio of exports and imports to GDP is even greater. All this allows us to assert that there is no single model of GDP use that would ensure the country's economic success and that should be taken as a model when building a post-war model of Ukraine's economy.

2. We can talk about different factors of economic growth that operate in countries with a high level of economic development and in countries with lower indicators. For the former, the expected relationship between the specific weight of investments in GDP and the rate of economic growth is not confirmed, while for the latter, such a relationship is present. Highly developed countries provide higher rates of economic growth not at the expense of investments, but at the expense of the development of foreign trade. Most likely, Ukraine will need to use both groups of factors to accelerate economic development in the postwar period.

3. The standard of living of the population is determined not only by the produced GDP per capita, but also by the volume of final household consumption per capita. In the course of the study, it was found that with an increase in GDP per capita, the specific weight of state final consumption increases, which confirms the hypothesis about the growing role of the state in meeting collective needs depending on the economic development of the country.

References

1. Dynan, Karen & Sheiner, Louise (2018). GDP as a Measure of Economic Well-being, Hutchins Center Working Paper #43, August. Retrieved from https://www.brookings.edu/wpcontent/uploads/2018/08/WP43-8.23.18.pdf.

2. Moulton, Brent (2018). The Measurement of Output, Prices, and Productivity: What's Changed Since the Boskin Commission. Hutchins Center on Fiscal and Monetary Policy Working Paper. July. Retrieved from https://www.brookings.edu/wpcontent/uploads/2018/07/Moulton-report-v2.pdf.

3. Nakamura, Leonard; Samuels, Jon, & Soloveichik, Rachel (2017). Measuring the `Free' Digital Economy with the GDP and Productivity Accounts. Federal Reserve Bank of Philadelphia Working Paper, No. 17-37.

4. Marcu, Nicu ; Carstina, Silviu-Valentin, & Marian, Siminica (2015). GDP Correlation Analysis with Structural Elements of Added Value. Procedia Economics and Finance, Volume 22, Pages 282-286. https://doi.org/10.1016/S2212-5671(15)00286-5.

5. Eurostat. Retrieved from https://ec.europa.eu/eurostat/data/database.

6. The Netherlands: The Largest Offshore Jurisdiction in The World? Retrieved from https://medium.com/@icoservices/the-netherlands-the-largest-offshore-jurisdiction-in-the-worlda3866625b46a#:~:text=There%20is%20one%20jurisdiction%20that,the%20world's%20biggest% 20offshore%20jurisdictions.

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