While the trend towards increased convergence of European economies as measured by their GDP per capita is continuing, the income dispersion among the EU Member States remains remarkably high. In 2007, Bulgaria’s gross domestic product (GDP) per inhabitant was just 14 percent of Luxembourg's, or 37 percent of the EU total. Luxembourg, Ireland and the Netherlands stand out with the highest GDP per capita in the EU, while Bulgaria has the lowest level among the Member States.

This article focuses primarily on gross domestic product (GDP) per capita in the 27 EU Member States, but also looks at the level of actual individual consumption (AIC) per capita and at countries' comparative price levels. Furthermore, the analysis covers not only the 27 EU Member States, but also the three EU Candidate Countries (Croatia, the Former Yugoslav Republic of Macedonia, Turkey), three EFTA Member States (Iceland, Norway, Switzerland) and four Western Balkan countries (Albania, Bosnia and Herzegovina, Montenegro, Serbia). Figures refer to the years 2005, 2006 and 2007, while the text focuses on 2007 unless otherwise stated.

Per capita volume indices

The per capita volume indices, shown in the chart and in table 1, represent the real volume of GDP and AIC in per capita terms. "Real volumes" means that the figures have been adjusted for price level differences across countries, using purchasing power parities (cf. box 1).They are expressed in relation to the European Union average (EU27=100). If the per capita GDP (or AIC) volume index of a certaincountry is higher than 100, that country’s level of GDP (or AIC) in per capita terms is higher than for the EU27 as a whole. The indices should be interpreted with some caution, allowing for error margins. For example, in 2007 the GDP volume index per capita for Belgium is 118, while that of Denmark is 120. In reality, these figures tell us that the GDP per capita is of similar magnitudein the two countries.

The European Comparison Programme (ECP) is an international statistical programme involving Eurostat and the National Statistical Offices of the participating countries, as well as the OECD and its non-European Member States. The ECP is aimed at making annual volume comparisons of National Accounts, in practice of GDP and its main components. Volume comparisons imply that for each country a price level indicator is required. This indicator is referred to as a Purchasing Power Parity (cf. box 1).

Relative volumes of GDP per capita

The left-hand part of table 1 shows the countries’ volume indices of GDP per capita.

Luxembourg stands out with a GDP per capita far above any other of the countries covered. This is to a significant extent due to a particular property of the country’s economy: Luxembourg has a large number of cross-border workers relative to its resident population. While they contribute substantially to GDP, these workers are not included in the population figure used to calculate GDP per capita. This does not mean that the figure for Luxembourg is wrong, but it does indicate that GDP per capita cannot be used uncritically as an accurate indicator of, for instance, residents' material living standards. Other Member States with a high GDP per capita, 20 percent or more above the EU overall level, are Ireland, the Netherlands, Austria, Sweden and Denmark. The case of Ireland is particularly interesting, because comparable statistics from a few years back used to indicate that the country had a lower GDP per capita than most of the other, old EU Member States. The positive development for Ireland continues throughout the years 2005-2007. However, because many companies resident in Ireland are foreign-owned, it is not surprising that Ireland's consumption per capita (cf. next section) is far more in line with other EU Member Statesthan its GDP per capita. Belgium, the United Kingdom, Finland and Germany come out at approximately the same level of GDP per capita, at 15-19 percent above the EU overall level. France, Spain and Italy are all within 10 percent above this reference level,Greece and Cyprus within 10 percent below.Among the Member States that have joined the EUsince 2004, Cyprus and Slovenia are the wealthiest, while the Czech Republic and Malta are at a level similar to that of Portugal. The development for the Czech Republic seems clearly positive over the three years covered here, while the other three remain at more or less the same level.

The other new Member States have a GDP per capita between 30 and 60 percent below the overall EU level. Estonia, Slovakia, Lithuania, Latvia and Romania appear to have a clearly positive development of their GDP per capita from 2005 to 2007. Bulgaria, the EU Member State with the lowest GDP per capita, and Poland also show growth. Hungary, on the other hand, appears to be stagnating for the time being. Among the non-EU countries included here, the three EFTA Member States are clearly among the high-income countries of Europe. This is particularly so in the case of Norway, a major petroleum exporter with a relatively small population, but Switzerland surpasses the Netherlands as well, although it does not reach the level of Ireland. Iceland’s GDP per capita is in line with Denmark’s, 19 percent above the EU overall level. On the other hand, the EU Candidate Countries Croatia and Turkey have a GDP per capita similar to some of the lower EU Member States, while the third Candidate Country, the former Yugoslav Republic of Macedonia, comes out at a level belowBulgaria's. The four Western Balkan countries without candidate status, Montenegro, Serbia,Bosnia-Herzegovina and Albania, are among the poorest in Europe in relative terms, with Albania's GDP per capita being about one quarter of that of the EU. However, two of these countries,Montenegro and Bosnia-Herzegovina, show considerable growth from 2005 to 2007.

Relative volumes of consumption per capita

GDP per capita is an important and widely used indicator of countries’ level of economic welfare. However, it should not be applied uncritically. For instance, if one intends to compare the relative welfare of consumers across various countries, it can be more fruitful to focus on consumption per capita rather than on GDP. Actual individual consumption includes consumer goods and services purchased by households, in addition to services provided by non-profit institutions and general government for individual consumption, for example, health and education services. In other words, AIC covers all goods and services actually consumed by households. In international comparisons, it is usually preferred over the narrower concept of household consumption, because the latter is influenced by the extent to which non-profit institutions and general government act as service providers. AIC per capita is usually highly correlated with GDP per capita, because AIC is in practice by far the biggest expenditure component of GDP. Volume indices of AIC per capita are shown in the right-hand part of table 1. A striking feature is that AIC per capita is considerably more homogeneous across countries than GDP per capita. Although it is clearly the case that high GDP and high consumption go hand in hand, the wealthiest countries appear rather less wealthy, in relative terms, if we analyse consumption instead of GDP. For example, while we have seen that Luxembourg, Ireland and the Netherlands are the highest EU Member States in terms of GDP per capita, their relative volumes of consumption are far closer to the EU overall level. The same effect is apparent in the case of Norway, Switzerland, Austria, Sweden and Denmark,among others. On the other hand, there is a tendency for countries with a low GDP per capita to appear better off if we look at AIC. This is the case for most of the countries in south-eastern Europe, and for some of the new Member States like Latvia, Lithuania and Romania as well. The overall picture is rather complex, though. For instance, even though the United Kingdom clearly belongs to the high-income countries as measured by GDP per capita, in terms of AIC per capita its position is even better, coming second after Luxembourg. On the other hand, there are some countries in the lower income groups, like Croatia, Slovakia and Estonia that appear less well off if AIC per capita is applied. This effect is also quite pronounced for Slovenia and the Czech Republic.

Comparative price levels in Europe

As explained above (cf. box 1), the volume indices of GDP and AIC take differences in price levels across countries into account. The price level indicator can be an interesting object of study in its own right. Table 2 shows countries' comparative price levels of GDP and AIC expressed in relation to the overall price level of the 27 EU Member States. In the following, we will focus on AIC, as these price levels include only goods and services actually consumed by households. Denmark has the by far highest price level in the EU, although it is surpassed by EFTA members Iceland and Norway. The third EFTA country, Switzerland, along with Ireland, Luxembourg, Sweden and Finland, also have price levels that exceed the EU overall level by more than 20 percent. The United Kingdom comes out somewhat below this, while France, Belgium, Italy, Austria, the Netherlands and Germany all have quite similar price levels, slightly above the EU overall level. It is worth noting that the comparative price level of all the new Member States is below that of the EU27, for most of them considerably so. While Cyprus has a price level in line with that of Greece and Spain, about 10 percent lower than the EU average, the majority of the new Member States have price levels between 20 and 50 percent lower than the EU27. This is the case for Slovenia, Malta, Estonia, Hungary, Latvia, Slovakia, Poland, the Czech Republic, Romania and Lithuania, along with the Candidate Countries Croatia and Turkey. The lowest price levels in Europe are found in the southeast. Serbia, Montenegro, Bosnia-Herzegovina, Albania, Bulgaria and the former Yugoslav Republic of Macedonia all have price levels of about half the EU overall level, or even considerably less in the case of the three latter. Denmark's price level is almost 3.5 times higher than Bulgaria's. This example shows that the price dispersion among EU Member States remain very considerable, in spite of close economic integration. However, there is a tendency towards more homogeneous price levels in the EU, with most of the new Member States catching up over time. In the section on GDP per capita, we have seen that the catching-up process is also apparent for that indicator as well. A basic indicator of the price level dispersion within the euro area (EA15), the EU27 and all the 37 countries has been included at the bottom of table 2. This indicator is calculated as the coefficient of variation of the comparative price level indices above. It appears that price levels are far more homogeneous within the euro area than in the EU27, while the price dispersion is, unsurprisingly, even greater within the entire group of 37 countries. Furthermore, there is an indication that while price convergence continues within the EU27 and indeed within Europe as a whole, it may be less pronounced within the euro area.