The assignment

There is currently a strong controversy as to whether Europe is currently losing ground to the U.S. and if so, how much that is the case. You can see this at the beginning of this article by Arnaud Leparmentier: “In 2008, the eurozone and the US had equivalent gross domestic products (GDP) at current prices of $14.2 trillion and $14.8 trillion respectively (€13.1 trillion and €13.6 trillion). Fifteen years on, the eurozone’s GDP is just over $15 trillion, while US GDP has soared to $26.9 trillion.” https://www.lemonde.fr/en/opinion/article/2023/09/04/the-gdp-gap-between-europe-and-the-united-states-is-now-80_6123491_23.html.

Replicating

Where is Arnaud Leparmentier’s data coming from ? Plot the data, both in values and using an index 100 for 2008, to see the percentage increase. Also take Europe as an index 100 in 2008, to see how much the difference between Europe and US has changed.

The data may come from the authoritative official databasesauthoritative official databases such as WDI, World bank , IMF, and Eurostat Data. The Difference is as follow:

library(tidyverse)
library(scales)
library(WDI)
WDI(country = c("US", "EU"), indicator = "NY.GDP.MKTP.CD") %>%
  mutate(date = paste0(year, "-01-01") %>% as.Date()) %>%
  filter(year >= 2008) %>%
  group_by(country) %>%
  mutate(indice = 100*NY.GDP.MKTP.CD/NY.GDP.MKTP.CD[year == 2008]) %>%
  ggplot() + geom_line(aes(x = date, y = indice, color = country)) +
  theme_minimal() + xlab("") + ylab("2008 = 100") +
  scale_color_manual(values = c("#003399", "#BF0A30")) +
  scale_x_date(breaks = seq(2008, 2100,  2) %>% paste0("-01-01") %>% as.Date,
               labels = date_format("%Y")) +
  theme(legend.position = c(0.2, 0.8),
        legend.title = element_blank())

Adding a difference line in plot

gdp_data <- data.frame(
  Year = c(2008, 2023),
  Europe_GDP = c(14.2, 15.0), # in trillions
  US_GDP = c(14.8, 26.9) # in trillions
  )

base_year <- 2008

gdp_data$Europe_Index <- (gdp_data$Europe_GDP / gdp_data$Europe_GDP[gdp_data$Year == base_year]) * 100
gdp_data$US_Index <- (gdp_data$US_GDP / gdp_data$US_GDP[gdp_data$Year == base_year]) * 100

gdp_data$Index_Difference <- gdp_data$US_Index - gdp_data$Europe_Index

library(ggplot2)

ggplot(gdp_data, aes(x = Year)) +
  geom_line(aes(y = Europe_Index, color = "Europe")) +
  geom_line(aes(y = US_Index, color = "US")) +
  geom_line(aes(y = Index_Difference, color = "Difference")) +
  scale_y_continuous(name = "Index (Base Year 2008 = 100)", labels = scales::comma) +
  scale_color_manual(values = c("Europe" = "blue", "US" = "red", "Difference" = "green")) +
  theme_minimal() +
  labs(title = "GDP Index Comparison from 2008 to 2023")

Apart from looking at the figure, we could also see how much the difference between Europe and the US has changed by calculating.

In 2008, the GDP of the eurozone was $14.2 trillion, and the GDP of the US was $14.8 trillion. In 2023, the GDP of the eurozone is just over $15 trillion, while the US GDP has soared to $26.9 trillion.

First, let’s calculate the absolute GDP growth for both regions: Eurozone GDP growth from 2008 to 2023: 15−14.2 = 0.8 trillion USD US GDP growth from 2008 to 2023: 26.9−14.8 = 12.1 trillion USD

Next, we calculate the percentage growth for both regions from their 2008 levels: Eurozone GDP percentage growth: (0.8/14.2)x 100 = 5.63% US GDP percentage growth: (12.1/14.8)x100 = 81.76%

To find the percentage difference in GDP growth between the two regions from 2008 to 2023, we subtract the Eurozone’s growth percentage from the US’s growth percentage: 81.76%−5.63% = 76.13%

Therefore, the percentage difference in GDP growth between Europe and the United States from 2008 to 2023 is 76.13%. This calculation shows that the US GDP has grown significantly more in percentage terms compared to the eurozone’s GDP over the specified period.

Extending

What if you take into account population and or employment growth ? Does it change the result much ?

To assess whether the inclusion of population or employment growth significantly alters the interpretation of GDP growth between Europe and the United States from 2008 to 2023, we need to consider GDP per capita and potentially GDP per employed person. These metrics adjust GDP growth for changes in population and employment, respectively, providing a clearer picture of economic performance in terms of productivity and standard of living.

1.1 GDP Per Capita Analysis

Given:

  • US GDP Growth: 81.76%

  • Eurozone GDP Growth: 5.63%

  • US Population Growth (2008-2023): 11.21% —— Total Population in 2008: 305,694,910; in 2023: 339,996,563 (Statista, 2024)

  • Eurozone Population Growth (2008-2023): 3.25% —— Total Population in 2008: 338,599,969; in 2023: 349,616,346 (Statista, 2024)

    Therefore,

    US GDP Per Capita Growth: 81.76%−11.21%=70.55%

    Eurozone GDP Per Capita Growth: 5.63%−3.25%=2.38%

    The GDP per Capta Percentage Difference is 70.55%- 2.38%= 68.17% < 76.13%. The difference becomes smaller.

1.2 GDP Per Employed Person Growth

US Employment Rate in 2008: 62.2%; US Employment Rate in 2023: 60.3% (Statista, 2024) Eurozone Employment Rate in 2008: 65%; Eurozone Employment Rate in 2023: 70.6% (Eurostat,2024)

Change in US Employment Rate: 60.3% / 62.2% - 1 = -3.05% Change in Eurozone Employment Rate: 70.6% / 65% - 1 = 8.62%

Now, we can approximate the GDP growth per employed person by adjusting the GDP growth rate by the change in employment rate:

US GDP Growth Per Employed Person: 81.76%+ (−3.05%)= 78.71% Eurozone GDP Growth Per Employed Person: 5.63%+ 8.62%= 14.25%

Therefore, the percentage growth of GDP per employed person difference between US and the eurozone is 78.71%- 14.25%= 64.46%.

After adjusting for population and employment growth, the United States has higher GDP per capita growth and higher employment per capita growth than the Eurozone from 2008 to 2023. However, the significant improvement in euro area employment rates suggests higher participation in the labor force. economy, which is a positive sign of economic health and may contribute to future GDP growth. Even as employment fell in the United States, its GDP growth per employee remained strong, indicating strong productivity growth. In summary, although the gap that we get in the first section reduced, there is a big gap between the GDP of the United States and the GDP of the Eurozone.

Robustness ?

Use other measures of GDP in order to assess the robustness of Leparmentier’s findings. Plot the results you obtain.

To assess the robustness of Arnaud Leparmentier’s findings regarding the growing GDP gap between Europe and the United States from 2008 to 2023, we can analyze the GDP per capita based on purchasing power parity (PPP) for both regions over this period. GDP per capita PPP is a useful metric for comparing living standards and economic performance across countries, as it accounts for differences in prices and purchasing power. Using data from the World Bank, IMF, and OECD, we can compare the GDP per capita PPP for the European Union (EU) and the United States:

In 2008, the GDP per capita PPP (current USD $) was: European Union: $33,872; United States: $50,384

In 2023, the GDP per capita PPP (current USD $) was: European Union: $50,956; United States: $76,027

Calculating the growth rates from 2008 to 2023:

European Union: (50,956 - 33,872) / 33,872 * 100 = 50.4%

United States: (76,027 - 50,384) / 50,384 * 100 = 50.9%

While both regions experienced similar growth rates in GDP per capita PPP over this period, the United States maintained a significantly higher level throughout. In 2022, the US GDP per capita PPP was nearly 50% higher than that of the EU.

library(ggplot2)

years <- 2008:2022
us_gdp_per_capita_ppp <- c(55.4, 53.5, 54.5, 55.0, 55.8, 56.4, 57.3, 58.4, 59.0, 59.9, 61.3, 62.5, 60.2, 63.6, 64.6)
euro_area_gdp_per_capita_ppp <- c(44.0, 41.9, 42.6, 43.4, 42.9, 42.7, 43.1, 43.9, 44.5, 45.6, 46.3, 47.0, 44.0, 46.6, 48.0)

data <- data.frame(Year = years, US_GDP_per_capita_PPP = us_gdp_per_capita_ppp, Euro_Area_GDP_per_capita_PPP = euro_area_gdp_per_capita_ppp)

ggplot(data, aes(x = Year)) +
  geom_line(aes(y = US_GDP_per_capita_PPP, color = "US")) +
  geom_line(aes(y = Euro_Area_GDP_per_capita_PPP, color = "Euro Area")) +
  labs(title = "GDP per Capita PPP: US vs Euro Area (2008-2022)",
       x = "Year", y = "GDP per Capita PPP") +
  scale_color_manual(values = c("US" = "blue", "Euro Area" = "red")) +
  theme_minimal()

Breaking it down

Break this performance down between European countries. Who’s to blame ?

GDP Growth

According to the data, GDP growth varied significantly across European countries in recent years:

Unemployment

Unemployment rates also show significant variation between European countries:

Spain, Greece, Italy and France tend to have unemployment rates persistently above the EU average.

Inflation

Inflation dynamics have been uneven as well:

According to above, several larger economies such as Italy and Spain, as well as France to some extent, have consistently performed poorly in terms of growth and employment compared to the EU average. The German economy has also significantly slowed down recently. Meanwhile, some smaller economies in Central and Eastern Europe have performed better in indicators such as unemployment rates.

However, “blaming” specific countries is too simplistic, as economic challenges reflect the complex interactions between governments controlling internal and external factors. The EU and the eurozone are closely connected, so economic problems in one country may spread to other countries.

Ultimately, boosting the overall economic vitality of the EU may require a multi pronged approach, including reforms at the national level to enhance competitiveness and productivity, as well as policies at the EU level to deepen the single market, support investment and innovation, and promote economic integration. Between member states. Achieving a strong and inclusive recovery from the epidemic remains a top priority.

Writing a short piece

Write a short piece (300 words, about 2 paragraphs, and 2 graphs of your own choosing) about the relative economic performance of Europe versus the U.S.

Compared to the United States, the economic performance of Europe has always been a controversial topic, especially considering recent challenges such as Germany’s energy crisis and basic issues such as innovation. There is a GDP gap between the United States and the European region, partly due to the intensified energy crisis caused by the conflict in Ukraine, which has had a significant impact on Germany, a major European economy. The sudden loss of natural gas from Russia not only disrupts energy supply, but also affects broader industrial production and economic stability.

Innovation and technological progress are other areas where the United States surpasses Europe. Despite having numerous innovation leaders in Europe, the strong growth and economies of scale in the US technology industry have led to a more competitive environment. American companies such as Apple, Microsoft, and Google have driven digital growth in the US technology industry and contributed to its success. The technological gap in Europe is evident in areas such as information and communication technology and pharmaceuticals. Compared to their American counterparts, large European companies have lower profits and less research and development investment. Meanwhile, the number of IPOs in Europe is also continuously decreasing (AFME, 2023).

In the United States, consumer spending has shown extraordinary resilience, continuing to grow despite high prices and economic uncertainty. According to recent data, even after adjusting for inflation, US consumer spending increased by 0.4% in September 2023 (AP, 2023). This growth is attributed to a strong economic growth rate of 4.9% in the third quarter of 2023, which is the fastest growth rate since 2021, mainly driven by consumer spending. American consumers have been using savings and are increasingly using credit cards, reflecting their confidence in their personal financial situation and overall economy(Allianz, 2023). The historically low savings rate supports this trend, indicating that many households are reducing the savings accumulated during the pandemic.

In contrast, the eurozone has shown a more cautious situation. Consumer spending in the eurozone has been recovering, slightly increasing from 1542.76 billion euros in the previous quarter to 1543.62 billion euros in the fourth quarter of 2023 (TradingEconomics, 2024). However, the slow pace of recovery due to high inflation and tight monetary policy has suppressed consumer sentiment and spending. Consumer confidence in the Eurozone remains below the long-term average, reflecting ongoing concerns about the economic outlook and personal financial condition(Deloitte, 2024).

The contrasting consumption behaviors between the Eurozone and the US—characterized by robust spending in the US and cautious spending in the Eurozone—have contributed to the widening GDP gap. The US’s ability to stimulate consumer demand through fiscal policies and the resilience of its consumers has supported higher GDP growth rates. In contrast, the Eurozone’s challenges, including high inflation and a more significant impact from energy price shocks, have dampened consumer spending, contributing to slower economic growth. This divergence underscores the importance of consumption behavior as a key determinant of the GDP gap between the Eurozone and the US.

Reference

Annual employment rate U.S. 2023 | Statista. (2024, February 15). Statista. https://www.statista.com/statistics/192398/employment-rate-in-the-us-since-1990/

Statista. (2023, November 7). Employment rate in the European Union 2005-2023. https://www.statista.com/statistics/1194672/employment-rate-in-europe/https://tradingeconomics.com/euro-area/gdp-per-capita-ppp

Allianz | US & Eurozone growth defying gravity. (n.d.). Allianz.com. https://www.allianz.com/en/economic_research/insights/publications/specials_fmo/us-eurozone-growth.html

Rugaber, C., & D’innocenzio, A. (2023, October 30). US consumers keep spending despite high prices and their own gloomy outlook. Can it last? | AP News. AP News. https://apnews.com/article/spending-consumers-inflation-economy-growth-federal-reserve-b1d34bc43a0da960a152911b7c230881

Yanatma, S. (2024, March 5). Inflation in Europe: Which countries have the highest and lowest inflation rates? Euronews. https://www.euronews.com/business/2024/03/05/inflation-in-europe-which-countries-have-the-highest-and-lowest-inflation-rates

TRADING ECONOMICS. (n.d.). Euro area consumer spending. https://tradingeconomics.com/euro-area/consumer-spending

Eurozone economic outlook, April 2024. (2024, April 10). Deloitte Insights. https://www2.deloitte.com/us/en/insights/economy/emea/eurozone-economic-outlook.html

Readings

Resources

Here are some data resources you might wish to use on my personal website:

Note that the echo = FALSE parameter was added to the code chunk to prevent printing of the R code that generated the plot.