AI + Minerals = $$$ (3 Urgent Investments)

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There are assertions that, on the face of them, should be dismissed immediately as nonsense. But modern science tells us not to trust our first instincts in favor of “the numbers,” or “the data,” or “the stats.”

The problem is that if the numbers are miscalculated or misinterpreted, we start to believe stupid things.

For instance, a significant number of X users genuinely believe Spain and Portugal combined are richer than Russia. Anyone who’s been to these countries knows this is absurd on the face of it, for reasons I’ll elaborate on later. But one stat “tells us otherwise,” and the wannabe quants buy it. I’m embarrassed for them.

In this article, I’m going to smash through those bad stats so you can embarrass your dinner party companions who are too clever by half.

Let’s start with the stats and why they don’t necessarily work.

Why GDP Is a Flawed Metric

Gross Domestic Product (GDP) calculates the total value of goods and services produced within a country’s borders over a specific period. While widely used, GDP has several significant limitations.

GDP doesn’t reflect the distribution of wealth or income within a population. A country can have a high GDP despite experiencing extreme inequality, as measured by the Gini coefficient. Informal work, household labor, and volunteer efforts aren’t included in the count, despite their significant economic value.

But the main problem with GDP is that it’s a spending measure. Lord Keynes’ formula for GDP, GDP = C + I + G + (X – M), or Consumption + Investment + Government Expenditure + Exports – Imports, is calculated by the amount of spending. For instance, Dubya moved GDP whole percentage points in the early 2000s with his insane increases in defense spending, which is reflected in the “G” component of the formula.

A high GDP doesn’t guarantee a high quality of life or citizen happiness, as evidenced by the average American. GDP can also rise due to unsustainable factors (e.g., selling off natural resources, rebuilding after a disaster), which don’t favor long-term economic health.

Problems with Comparing Nominal GDP Across Countries

Nominal GDP calculates economic output using current exchange rates, creating several issues.

Currency values fluctuate for various reasons, leading to misleading international comparisons. Goods and services may be far cheaper in one country than another.

Do you think gas in Saudi Arabia is expensive? Of course not. It’s only $2.35 a gallon. That’s the advantage of putting your country on one of the largest known petroleum deposits on Earth.

To compare, the cheapest state to buy gas in the U.S. is Mississippi, at $2.71 per gallon. In Governor Gruesome’s California, the average price is $4.51 per gallon.

Nominal GDP doesn’t reflect this, undervaluing the real output of lower-cost economies. A country with a weaker currency may appear economically smaller despite a high volume of domestic production.

The Case for Using GDP by Purchasing Power Parity (PPP)

When comparing the economies of different countries, using GDP by Purchasing Power Parity (PPP) is considered the preferred method for comparison. PPP accounts for differences in price levels between countries, offering a more accurate picture of real purchasing power.

PPP allows direct comparisons of what people can buy, reducing distortions caused by currency exchange rates. PPP-based comparisons are less susceptible to short-term currency fluctuations, which can dramatically alter nominal GDP ranks.

Issues with Using GDP Per Capita for Wealth Comparison

GDP per capita divides a country’s total nominal GDP by its population to estimate average wealth. Therefore, this has the same problems as nominal GDP: GDP per capita is an average and hides significant disparities in wealth distribution; a high average may coexist with widespread poverty.

However, even worse, GDP encompasses all economic activity, including that which doesn’t directly benefit individuals (this is important), and it often overstates personal prosperity. Two countries can have similar GDP per capita but vastly different living standards due to price differences in their economies.

A more accurate way to compare wealth is to use the median income.

Median Income Is Superior to Average Income

When comparing individual economic prosperity across places, median income is generally a better metric than mean (average) income. The average income can be skewed upward by a small number of very wealthy individuals.

In contrast, the median income represents the middle value, meaning that half of the population earns more than the median, while the other half earns less.

The median income provides a clearer sense of what an ordinary person earns and can afford to spend, which is especially important in countries with significant income inequality. By focusing on the experience of the ‘middle’ resident, comparisons are less affected by extreme wealth concentration.

However, sometimes median income is challenging to find, especially in Europe, so you may need to resort to average income for comparison.

GDP and GDP per capita are popular measures, but they distort international and individual comparisons because they don’t account for inequality, exchange rates, cost of living, and actual well-being.

GDP by PPP and median income offer more precise, representative metrics for assessing and comparing economic prosperity among nations and their people.

Now, let’s examine an egregious example circulating online.

The “Mississippi Is Richer Than Germany” Myth

Before I begin, I’ve got no problem with places like Mississippi, Ireland, or even Canada. I’d live in the South if I ever had to move back to America.

But American triumphalism, while wearing a $36 trillion debt millstone around its neck, looks ridiculous. Likewise, I’m happy for the Irish to let American companies move their offshore cash through the Emerald Isle. But does that make the average Irishman wealthier? Of course not.

Now, this state-to-country comparison nonsense must come to an end.

According to this excellent video by Type Ashton, GDP per capita is an indirect measure of average income that can be distorted by capital-intensive industries, as seen in Mississippi, where it’s significantly higher than the actual average income.

Honestly, I’m glad Ole Miss has capital-intensive industries. But is that output filtering down to the general population?

Let’s see.

According to Ashton, the reason this myth arose is that Mississippi’s (nominal) GDP per capita is currently measured at $53,872, while Germany’s is $54,343. That’s close, but does it tell the whole story?

Of course not. Here’s the kicker: according to Ashton, Mississippi’s average income is only $30,529, whereas Germany’s is much closer to its GDP per capita number at $54,718.

Mississippi’s GDP, or output, exceeds its income by over $23,000.

And that’s not the worst part: Mississippi’s debt per person is $106,110. In Germany, the debt per person is only EUR 30,930.

Knowing all that, is Mississippi richer than Germany? Don’t be silly… It’s not even close. And we haven’t even gotten to other statistics, such as the Gini coefficient (Mississippi has a much wider income disparity than Germany), healthcare, and holidays.

Wrap Up

For your edification and entertainment, consider comparing the combined GDP of Spain and Portugal to Russia’s. (Hint: you’ll find Russia’s economy is now the fourth largest in the world by PPP, with a 15% income tax and barely any external debt.)

Is Ireland more prosperous than Canada? Is Alabama richer than Canada? And with all that debt, is the US that much better off than the EU?

It’s amazing what the numbers reveal when you remove your biases.

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