What determines the economic size of a nation in the world: Determinants of a nation’s share in world GDP vs. per capita GDP

Abstract

This study examines the determinants of economic size of a nation measured as its share in world GDP, in comparison with the conventional determinants of per capita income growth. These two indicators are complementary. The former represents the economic size (power) of a nation, whereas the latter stands for people’s standard of living. This paper first proves that the determinants of these two different aspects of economic growth are different. It then goes on to verify the followings. First, the determinants of the GDP share of each nation are the variables that represent the share of each nation in the world, such as shares in world population, investment, human capital, exports, R&D investment, and financial capital flows. Second, currency undervaluation promotes per capita GDP growth via increasing exports, but tends to reduce a country’s share in world GDP because undervaluation depreciates its GDP at market exchange rate, whereas its indirect effect through export share changes is uncertain due to the zero sum nature of competitive undervaluation among nations. Third, trades are important in world GDP share determination as long as it is measured by share in world exports which represent economic rivalry among nations. The study conducts conventional country-panel econometric analyses after it proposes some theoretical basis for such empirics.