Norway in a league of its own?

With a gross domestic product (GDP) per capita 86 per cent above the EU average, Norway may have established itself in a league of its own among European countries.

In international comparisons, GDP per capita is often used as a measure of material living standards. In recent years, Norway has established itself firmly in the European top league, even after the high price level in the country is taken into account.

 

Norway well ahead of neighbouring countries

Preliminary figures for 2011 published by Eurostat indicate that Norway’s GDP per capita is 86 per cent higher than the average for the 27 EU Member States and 18 per cent above Switzerland, which is next on the list. Switzerland is followed by the Netherlands, Ireland and Austria. Compared to other Nordic countries, Norway was 45–50 per cent ahead of Sweden and Denmark, and approximately 60 per cent ahead of Finland.

Unsurprisingly, the differences among European countries are substantial. For example, GDP per capita is less that half the EU average in EU Member States Bulgaria and Romania, as well as in Albania, Bosnia and Herzegovina, Macedonia, Montenegro and Serbia. It’s worth noting that crisis-hit Greece is about 20 per cent below the EU average. This constitutes a very substantial decline in just a few years.

As in previous years, one country comes out well ahead of Norway. That country is Luxembourg. The very high per capita GDP of Luxembourg is partly due to the fact that a large number of cross-border workers commute into the country and thus contribute to GDP without being part of the resident population.

 

GDP does not tell the whole story

In order to form a more robust picture of the living conditions in various countries, we need to look at other indicators in addition to GDP per capita. One such indicator could be for instance Actual Individual Consumption (AIC) per capita. AIC measures the amount of goods and services consumed by individuals, and will in many cases reflect households’ living standards better than GDP.

For a country with a high savings rate, like Norway, GDP per capita and AIC per capita may deviate quite substantially. Even though the same three countries – Luxembourg, Norway and Switzerland – come out on top in both comparisons, Norway is just 35 per cent above the EU average if we look at AIC per capita, and almost at the same level as Luxembourg. By comparison, Norway’s AIC per capita is 16 per cent higher than Sweden’s and around 20 per cent higher than AIC per capita in Denmark and Finland.

 

Relative price levels: exchange rates crucial

The figures referred to above have been adjusted for price level differences across countries. Failure to make such adjustments would lead to biased results in the sense that countries with high price levels, like Norway and Switzerland, would see their GDP and AIC overestimated relative to countries with low price levels, like the countries in south-eastern Europe.

If we look at the price levels of goods and services for individual consumption, Switzerland and Norway come out on top, with price levels more than 60 per cent above the EU average. Among the EU Member States, the highest price levels are found in Denmark, Luxembourg and Sweden. Norway’s price level is 10 per cent higher than Denmark’s and 23 per cent higher than the price level of Sweden. The lowest price levels in Europe are found in Macedonia, Albania and Bulgaria.

Currency exchange rates are crucial in international price level comparisons. For example, for many years the three EFTA countries Iceland, Norway and Switzerland had the highest price levels in Europe. Then, the massive depreciation of the Icelandic króna in 2008 “made Iceland cheaper” as seen from abroad, resulting in a relative price level just 13 per cent above the EU average in 2011. Similarly, the relative strength of the Swiss franc and the Norwegian krone contributes significantly to the high price levels in those two countries.

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