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Output volatility in small and large countries

The best investment advice is to diversify your asset portfolio because it reduces the volatility and risk of the portfolio. The same applies to the economic performance of countries. The better diversified they are in terms of sectors, the less they suffer from large economic fluctuations. (This concept applies when all other factors are equal, of course; we have recently seen that emerging economies suffer from large fluctuations.) So, how to illustrate the benefit of diversification? One way is to contrast a large country such as the U.S., which covers virtually every imaginable sector, with smaller countries whose size limits the number of industries they can have. The graph shows per-capital real GDP growth for the U.S. (thick black line) and for three countries whose combined population amounts to about 3.5% of the U.S. population. It is quite easy to see that U.S. GDP growth fluctuates less.

How this graph was created: Search for “Constant GDP per capita” for the various countries and add those series to the graph. Transform each series to “Percentage change” and emphasize the line for the U.S. so it stands out (in this case, it is thicker and black).

Suggested by Christian Zimmermann


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