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Why is the UK GDP Per Capita So Much Lower Than the US?

person counting money illustrating gdp per capita contrast between the uk and us

The sizable gap between UK and US GDP per capita has major economic implications. Understanding why America’s output per person exceeds Britain’s by 66% matters for evaluating living standards and productivity. 

This article analyses the factors causing the divergence, from industrial composition to taxation, and the impacts on competitiveness, inequality, and quality of life.

Quick Answer to Why the UK GDP per Capita is Lower than the US

The UK’s GDP per capita is around 40% lower than the US’s ($45,850 vs $76,398 in 2022). This is mainly due to lower productivity, higher taxes and government spending, and more employment in lower productivity service sectors rather than manufacturing and technology. 

This results in lower wages, living standards and global economic competitiveness for the UK versus the US.

Defining GDP Per Capita

Before we jump into how the UK’s GDP per capita is fairing against other countries, let’s first discuss what this means and how it’s calculated.

What is GDP Per Capita?

GDP per capita measures a country’s gross domestic product divided by its population. It represents the total value of goods and services produced per person and provides a snapshot of a country’s living standards and productivity. GDP per capita allows comparing economic output and income levels between countries, adjusted for population differences.

In simple terms, GDP per capita indicates how much economic output and income each individual within a country produces on average. A higher GDP per capita generally correlates with greater economic development, higher incomes, increased productivity and improved standards of living. It is one of the most widely used macroeconomic indicators of economic health and growth.

Calculating GDP Per Capita (PPP vs. Nominal)

There are two ways in which to calculate the GDP per capita of a country. Using the PPP measure, or nominal; both have their use cases, benefits and drawbacks.

Most GDP statistics are reported by national statistical agencies or international organisations like the World Bank.

These institutions gather economic data like consumer spending, investments, government expenditure and trade balances to derive GDP. Population data typically comes from country censuses and demographic surveys.

Purchasing Power Parity (PPP) GDP

Purchasing power parity (PPP) is a measure of relative prices between countries that uses a basket of goods and services to compare the cost of living. 

It is calculated by taking the price of the same basket of goods and services in different countries and converting it to a common currency, such as US dollars. This allows for more accurate comparisons of living standards between countries with different exchange rates.

Nominal GDP

Nominal GDP per capita is calculated by dividing a country’s gross domestic product (GDP) by its population. GDP is the total value of all goods and services produced in a country within a given period of time. 

Nominal GDP per capita is a measure of a country’s economic output per person, but it does not take into account differences in the cost of living.

Which is Better?

PPP per capita is generally considered to be a more useful measure of economic well-being than nominal GDP per capita. This is because it takes into account differences in the cost of living, which can vary significantly between countries. 

For example, a nominal GDP per capita of $10,000 in the US may be equivalent to a PPP per capita of $20,000 in India, due to the lower cost of living in India.

This article is based on the PPP per capita, not nominal. The PPP per capita is a much more useful measure of a country’s standard of living.

Significance as an Economic Indicator

GDP per capita has become a widely used and recognised indicator of economic strength and standards of living. It allows cross-country comparisons of average living standards and productivity after adjusting for population.

For example, the UK’s GDP per capita is around $45,000 compared to $76,000 for the US. This indicates the average American has over 50% higher economic productivity and income than the average Briton. Comparing GDP per capita between countries highlights differences in development and prosperity.

Within countries, GDP per capita can demonstrate regional economic divides. London’s GDP per capita is far greater than poorer northern regions of the UK. Rising GDP per capita also signifies increasing national economic growth and prosperity over time.

GDP per capita provides a simple yet insightful metric to compare economic performance across borders and analyse economic progress within countries. It remains one of the most widely used indicators of economic development and average living standards globally.

Current GDP Per Capita Gap Between UK and the US

The UK GDP is far lower than that of the US, but why is this the case? Let’s discuss why the US has a GDP per capita, historical considerations, and international rankings to paint a better picture.

Overview of the Gap

According to the latest World Bank data, the United States has a substantially higher GDP per capita than the United Kingdom. In 2022, US GDP per capita stood at $76,398 while the UK’s was $45,850.

This means the average American citizen produces over $30,000 more in economic output and income annually than the average Briton. The US enjoys nearly 66% higher productivity and living standards per capita compared to the UK.

The sizable gap in GDP per capita signifies that the US maintains a considerable economic advantage over the UK in terms of average incomes and productivity. America’s higher GDP per capita correlates with greater national wealth and higher living standards.

Historical Context

Looking back over past decades, the US has generally maintained a significant lead in GDP per capita over the UK. However, the gap has fluctuated over time.

In 1980, US GDP per capita was $12,232 versus $7,337 in the UK – a lead of around 67%. By 2000, the US lead had shrunk slightly to around 60% with GDP per capita of $36,714 against $22,705 in Britain.

Post-Financial Crisis, the gap widened again to average around 65% over the last decade. The US has seen faster per capita growth, although UK GDP per capita has also steadily risen over time as well.

The historical data indicates the US has consistently leveraged its higher productivity, technological innovation and flexible labour markets to sustain an advantage in GDP per capita over the UK.

International Comparisons

The US ranks 8th highest in GDP per capita globally as of 2022, behind tax havens like Luxembourg and Singapore. The UK ranks in 27th place, with GDP per capita significantly below G7 peers like Germany and Canada.

Among large advanced economies, the US outperforms major European countries like Germany, France and the UK in GDP per capita. America’s more limited government, lower taxes and privatised healthcare appear to confer an edge.

Meanwhile, the UK lags other English-speaking developed nations including Australia, Canada and the US in GDP per capita. Its ranking falls behind Western European counterparts like Switzerland, Ireland and Iceland as well.

The US enjoys an upper rank globally in GDP per capita, while the UK falls in the middle of the pack among wealthy developed economies. Closing the GDP per capita gap with America remains an economic development priority for Britain.

globe

Factors Contributing to the Gap

There are many macro environmental factors that contribute to a country’s GDP per capita. From a difference in work ethic to government spending and taxation, we can start to look at why there is such a noticeable gap between the UK and US GDP per capita.

FactorUSUK
ProductivityHigher labour and multifactor productivityLower productivity, insufficient investment in tech
Industrial CompositionLarger manufacturing & high-tech baseHeavily oriented towards services
Government SpendingUnder 35% of GDPAround 40% of GDP
TaxationLower taxes, more capital accumulationHigher taxes, dampens private sector
Social OutcomesLower poverty rates, higher income inequalityHigher poverty rates, lower income inequality
Environmental ImpactHigher carbon emissions per capitaLower carbon emissions per capita

Productivity Differences

One major factor behind the UK’s lower GDP per capita compared to the US is weaker labour productivity. Output per hour worked is around 20% lower in the UK than in America. This translates into lower economic output per worker.

Several reasons account for Britain’s lingering productivity gap versus the US. Insufficient business investment in technology, equipment and R&D hampers productivity. The UK also lags in high-tech firm creation and diffusion of innovations.

Weaker skills and managerial expertise among UK workers inhibits productivity growth. Lower economies of scale for UK firms compared to giant US corporations also play a role. Boosting lacklustre productivity remains a key government priority for raising British living standards.

Industrial Composition

The UK has an economy oriented more heavily towards services like finance, business services and tourism. Meanwhile, the US retains a larger manufacturing and high-tech industry base.

Manufacturing firms typically exhibit higher labour and multifactor productivity levels than service companies. This composition effect depresses average productivity and GDP per capita for the more service-dominated UK economy versus America’s.

Business services also generate lower productivity than cutting-edge technology and research-intensive sectors where the US leads. The UK’s industry mix impacts its GDP per capita by shifting activity towards less productive areas than in the US.

Government Spending and Taxation

Divergences in government spending and taxation help explain differences in GDP per capita between the UK and US. Total government spending equates to around 44% of GDP in Britain versus under 42% in America.

Higher spending funded by heavier taxes dampens private sector dynamism and investment in the UK. It constrains productivity growth and reallocation of resources towards more innovative, higher value-added activities.

The US model of lower taxes and spending enables greater capital accumulation and market-driven growth. America’s more limited public sector frees up resources to expand productive private industry.

Lower taxes and spending support the US in leveraging its productivity and growth advantages relative to the UK. Government policy choices partially factor into America’s higher GDP per capita outcomes.

westminster

Implications of the Gap in GDP Per Capita

As with everything there are implications to having a high or low GDP per capita. A country having a lower GDP per capita suggests that the standard of living is lower as well as the cost of living being higher.

Standards of Living

The sizable gap in GDP per capita between the UK and US has tangible implications for living standards. Average wages adjusted for costs are around 38% higher in America than in Britain.

Higher productivity and economic output per person in the US translates into more disposable income and purchasing power. This allows Americans to consume more goods and services, from housing to healthcare.

Cost of living is also lower in the US when taking into account differences in taxes, healthcare and housing. And poverty rates are substantially lower than the UK, aided by higher wages.

In summary, the GDP per capita gap enables higher overall prosperity and quality of life in America versus the UK. Closing this gap would lift British living standards closer to American levels.

Economic Competitiveness

The UK’s lower GDP per capita compared to the US also impacts its global economic standing and geopolitical influence. The smaller UK economy accounts for under 3% of global GDP versus 25% for the US.

America’s preeminent economic power gives it an advantage in trade negotiations and ability to leverage the dollar’s reserve currency status. The UK lacks this degree of economic hegemony.

The UK also punches below its weight in share with global corporate giants. Only 3 UK firms rank among the top 100 globally by revenue, compared to 57 American firms.

Boosting GDP per capita would aid the UK in competing economically with the US and regaining stature on the global stage post-Brexit. But for now, its lower productivity constraints its competitiveness.

Social Impacts

Finally, lower GDP per capita in the UK versus the US contributes to weaker social outcomes. While income equality is higher in the US, it isn’t much better in the UK.

The UK’s lower productivity workforce experiences greater labour market precariousness. There is also less opportunity for upward economic mobility than in the US. By raising GDP per capita, the UK could potentially mitigate some of these adverse socioeconomic effects. Higher productivity and wages makes reducing inequality and poverty easier.

The GDP per capita gap with America amplifies the UK’s economic, political and social challenges. It is both a symptom and cause of Britain’s difficulties in keeping pace with the world’s productivity frontier.

money in a cup

Limitations of GDP Per Capita

While a country having a high GDP per capita is deemed as a good thing, there are some limitations to consider. 

Income Inequality

While useful, GDP per capita has some limitations as an economic indicator. Most significantly, it does not account for income distribution within countries. A higher GDP per capita doesn’t automatically translate into higher standards of living for everyone. If income gains disproportionately accrue to a rich elite, poverty may remain high even as GDP per capita rises.

For example, the US has substantially higher GDP per capita than the UK. But it also has worse income inequality, with income gains in recent decades skewed towards the top 1%. Prosperity has not been evenly shared.

To accurately assess standards of living, metrics like median income or rates of relative poverty are needed alongside GDP per capita. Relying solely on GDP per capita could mask growing inequality and a widening rich-poor divide.

Leisure Time

Another shortcoming of GDP per capita is that it does not account for leisure time enjoyed by citizens. Americans work almost 300 hours more per year (19% more) on average than Britons. The US prioritises higher economic output over free time and work-life balance. But having less leisure to spend with family, on hobbies or vacation may adversely impact quality of life and well-being.

So higher GDP per capita should not automatically be deemed “better” if it demands excessive working hours and reduced leisure. Time affluence is also a key component of prosperity not captured by GDP per capita.

Environmental Impact

Finally, GDP per capita is criticised for not reflecting ecological sustainability. Achieving higher output often comes at the cost of greater natural resource depletion and environmental damage.

For example, the US has significantly higher carbon emissions per capita than the UK and most European peers. Its higher GDP per capita relies partly on lacking carbon taxes and utilising dirtier energy sources.

While the UK has made significant progress in reducing carbon emissions in recent years and is committed to achieving net zero by 2050.

Metrics like carbon intensity of output can complement GDP per capita analysis. Sustainability and living standards for future generations should also factor into assessments of economic success. Ignoring ecological impact is a key limitation of GDP per capita.

While a valuable economic indicator, GDP per capita alone does not guarantee widespread prosperity. Supplementary indicators accounting for distribution, leisure time and sustainability provide a more holistic view of societal well-being.

wind turbines

Final Thoughts from UK vs. USA

There are various contributors and limitations of the GDP per capita metric, so a high score doesn’t necessarily correlate to a high standard of living. Despite the UK’s lower GDP per capita compared to the US, the country remains a desirable place to live and work.

If you found this article helpful, we also wrote about how different tax is between the UK and US.

UK vs. US GDP Per Capita FAQ:

Where does the UK rank in GDP per capita?

The UK ranks 21st in GDP per capita (nominal) and 28th in GDP per capita (PPP) as of 2023.

When did US GDP per capita surpass the UK?

The UK’s GDP per capita has traditionally been higher than that of the US, but the US surpassed the UK in 1916. This was due to a number of factors, including the rapid industrialisation of the US in the late 19th and early 20th centuries, the US’s large and growing population, and the UK’s involvement in World War I.

Who has the worst GDP per capita?

The country with the lowest GDP per capita in 2023 is Burundi, with a GDP per capita of $238. This means that the average person in Burundi earns less than $250 per year.

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