Most of us think of the United States as a single, uniform economy—even though we know that is not true. State economies differ across multiple dimensions such as size, growth rates, volatility, industry composition, population, employment, and productivity – to name just a few. The practice of focusing on averages and building narratives gloss over the realities at the state level. Though these may make it simpler to understand economic developments, it does not mean these explanations are either accurate or nuanced enough to understand what the real challenges are.
This article will discuss a specific aspect of economies – the size of the economy measured by GDP. It seeks to accomplish three key objectives: (i) it illustrates the significant variations in state economy sizes, (ii) it offers a logical framework for categorizing states, and (iii) it explores the advantages of larger economies compared to smaller ones.
Why are we beginning a deep dive into state economies by discussing their relative size? Just as no good policymaker or investor would believe that the distinct opportunities and obstacles facing countries like Germany and Liechtenstein are the same, the differences between states like California and Vermont are equally significant. Ultimately, each state faces its own set of challenges, and effective policies must embrace (rather than ignore) this diversity, recognizing that tailored approaches for each state can yield the most benefits. Even national programs should be attuned to the unique needs of individual states, harnessing the potential for maximized gains on a state-by-state basis.
What is GDP?
So, what exactly is GDP and what does it measure? The acronym stands for “Gross Domestic Product” and is the total market value of final goods and services produced in the country during a specific timeframe – for instance, the year 2023 in this context. Serving as a metric of significant importance, GDP offers a gauge of the scope of a country’s or a state’s economic activity. For instance, as of April 2024, the latest estimate of the US GDP is a staggering $27.4 trillion for 2022, vividly illustrating the nation’s economic vitality and progress.
Variation in State GDP
The United States has the world’s largest economy, yet it is a composite of 50 unique state economies, a federal capital district and other territories, each varying in size and complexity. The attached chart provides a clear view of the economic variation across states (including the District of Columbia), showing the relative sizes of individual state economies as a proportion of the overall U.S. GDP for 2023.
Among the array of state economies, three emerge as the titans of the field: California, Texas, and New York. Collectively, their economic prowess constitutes a formidable 31 percent of the entire U.S. economic landscape. In a league of its own, California single-handedly commands a 14 percent share of the nation’s economic might. California’s GDP boasts a staggering US$3.9 trillion, surpassing even the economic stature of India—the fifth largest economy in the world. Texas and New York follow as distant runners-up with respective GDPs of US$2.6 trillion and US$2.2 trillion.
In stark contrast, the ranks of the smallest economies (each equal to or less than 0.25 percent of US GDP) are comprised of Vermont, Wyoming, and Alaska. This group, modest in scale, collectively contributes 0.6 percent to the U.S. economy. Their combined GDP amounts to US$455 billion, akin in magnitude to the economies of Bangladesh or Singapore. However, unlike the three largest states, there are many other states similar in size to the three smallest states.
The “average” state GDP economy hovers around $534 billion. States such as Colorado, Tennessee, and Maryland are close to this average when it comes to their economies. However, as is apparent from the chart above, these three economies though “average” are well above the median state – meaning, the 25th largest state, Oregon. This state is in the middle of the distribution with a GDP of $316 billion. This discrepancy highlights the significant economic diversity among the states, emphasizing the importance of considering both average and median values when analyzing economic data that is spread out unevenly.
The data can be sliced and diced in different ways. However, the following three facts may provide you with a different perspective when you next hear news about the national economy. First, the eight largest states contribute almost half of the entire US economy. Second, there are 24 states where their economies are only about 1.0 percent or even less of the whole US economy. Third, if you combine the economies of the 26 smallest states, the sum is equal to the size of California’s economy. The significance of these facts will become clearer when we discuss economic growth in the next article.
Classifying State Economies: XS to XL
US state economies range in size from $43 billion to $3.9 trillion – a very wide range. For example, California’s GDP is 90 times Vermont’s. Even West Virginia is twice the size of Wyoming. These statistics are indicative of the incredible difference among states. However, there is no standardized way of classifying economies by size either in the US or abroad. One international agency classifies small economies as those with GDP less than $1 billion – a standard irrelevant to the US since all state economies exceed that threshold.
By eyeballing the data, US state economies can be categorized into five distinct categories. It is easiest to identify these as “extra-large”, “large”, “medium”, “small” and “extra-small”. California is in the first category. Texas and New York fall squarely into the “large” category. Florida is in-between categories, but is closer to “medium” size along with ten other states. These states range in size from 2.1 – 6.0 percent of the US economy. There are 13 “small” states that are between 1.1 – 2.0 percent of the US economy and the remaining 23 states are “extra-small” with a share of GDP up to 1.0 percent of US GDP.
The classification of states into the five groups is indeed arbitrary, especially when determining the cut-offs for medium, small and extra-small. Nevertheless, this categorization is helpful since it is one characteristic to take into account when beginning to identify the key economic challenges that small economies face compared to large ones.
So how do US states compare to countries? The state economies of Texas and New York are relatively large when compared to other countries. Texas’s economy is the eighth largest in the world—just above Russia’s economy in 2022. New York’s economy is sandwiched between Italy’s and Canada’s economy and ranks 11th in the world. When we turn to the medium-sized states, these are still large economies compared internationally. For example, Michigan’s GDP is US$659 billion and is the 21st largest economy in the world. Even Vermont’s economy would be ranked at 97th worldwide. Thus, all US states fall in the upper half of all economies in the world. This underscores the collective strength of state economies, positioning them squarely within the upper half of the world’s economic stage.
Policy Implications
The size of an economy holds significance for several reasons. There are some factors where larger economies may be considered stronger, while in other cases, small economies may have an advantage
- Market Potential: A larger economy translates to a larger consumer base, attracting businesses and investment. Companies can tap into a substantial market to sell their goods and services, fostering growth and innovation.
- Employment Opportunities: A larger economy tends to offer more job opportunities across various sectors, contributing to lower unemployment rates and increased prosperity.
- Investment Attraction: Sizable economies often attract higher foreign direct investment due to the potential for returns and stability.
- Resource Allocation: A larger economy can generate more tax revenue, enabling governments to invest in public services, infrastructure, and social programs.
- Innovation and Research: Larger economies have the resources to invest in research and development, driving innovation, technological advancements, and scientific discoveries.
- Resilience: Larger economies may be more resilient to economic shocks due to diversification and a broader range of industries.
Though smaller economies are challenged by their limited scale and resources, they do have some advantages as follows:
- Agility and flexibility: Smaller economies can often respond faster to changes in the global market. Their smaller bureaucracies and less complicated regulatory environments enable then to make decisions and implement policies more quickly.
- Niche specialization: They can focus on specialized markets or industries, carving out niches where they can become competitive. This specialization can lead to higher quality production and innovation in specific sectors.
- Customizable policies: Smaller economies can tailor their economic and fiscal policies more precisely to their specific needs and circumstances. This customization can lead to better economic management and growth.
- Favorable business environment: These economies can provide businesses with favorable conditions such as lower taxes, fewer regulations, and various incentives to attract out-of-state investment.
- Strategic geographical position: Some smaller economies benefit from geographic locations, serving as hubs or gateways for trade routes, tourism, or financial services.
- Attractive to foreign direct investment: A smaller economy can position itself as an attractive destination for FDI by offering advantages such as political stability, skilled labor, and targeted investments.
Though the size of an economy is relevant to economic decision making, it alone does not determine economic success. Many other policies such as an educated labor force, infrastructure, and social stability are critical characteristics. The next article will discuss economic growth across states.