Understanding the global economy has become more important for policymakers, given the increased interdependence in trade and capital flows. For the same reason, though, tracking the different economies has also become more complex. So it’s not surprising analysts find it convenient to group countries in blocs according to a characteristic or commonality. Examples include the G-7 (Canada, France, Germany, Italy, Japan, U.K., and U.S.), meant to designate the largest economies in the world, and the BRICS (Brazil, Russia, India, China, and South Africa), meant to designate the most significant emerging economies for their size and fast growth. And then there are the so-called PIIGS (Portugal, Ireland, Italy, Greece, and Spain), meant to designate European countries that were struggling to service their external debt a few years ago.
These classifications can be useful at certain points in time, but analysts and policymakers should keep in mind at least two important limitations. Countries in these blocs can behave very differently. And the classifications can very quickly become outdated, even if they continue to remain in use. I’ll illustrate these two limitations with FRED data for the BRICS.
Let’s look at real total GDP for these five countries, normalized so they all equal 100 in 1990. Using an index allows us to abstract from the large size differences of these countries and also gives a more transparent picture of how quickly each of these countries has grown between 1990 and 2014. The graph shows some large differences, indeed. China has grown dramatically since 1990—by a factor of 6. India is a distant second, growing by a factor of 4. Both Brazil and South Africa, in the middle, have doubled the size of their economies. Russia, which is last, has grown by barely 18% during the sample period; in fact, if anything, Russia’s economy was below its initial 1990 size for much of the 1990s and early 2000s.
So, should the BRICS be grouped together as a bloc? Only Brazil and South Africa behave in a reasonably similar way. Otherwise, these countries have big differences in economic behavior and their resulting relative importance.
A similar exercise could be done for the G7, where the relative importance of countries has also changed considerably. You may have known this already, but the G-7 no longer represents the seven largest economies: Canada and Italy have been replaced by China and India. And the internal rankings have also changed for the European countries, with Germany in 4th place, the U.K. in 5th, and France in 6th.
How this graph was created: Search for “real GDP at constant national prices for [country]” where [country] can be replaced by the actual name of the country you want. Select the units so that all variables are scaled by an index that sets the value of 100 for 1990. Choose 3 for the width for all lines.
Suggested by Alexander Monge-Naranjo.