Economic indicators such as real GDP per capita are the best way of measuring standards of living in a country.
“Economic indicators such as real GDP per capita are the best way of measuring standards of living in a country”. Discuss. [15m]
This essay discusses if economic indicators are the best way of measuring standards of living in a country. Gross domestic product is defined as the value of all final goods and services produced by factors located domestically in a country, over a given time period, usually a year. Real output refers to the physical amount of goods and services produced, whereas nominal output refers to the money value of the goods and services produced. Suppose an economy only produces one good and the quality produced is 100 units. If the current price of the good is $10, then the total value of output, i.e. the GDP is 100 X $10 + $1000. One year later if the prices rises to $11 while the amount production remains unchanged at 100 units, nominal output has increased to $1100, but real output has actually not changed. Thus the rise in the price level increases the nominal output without actually increasing real output, so in order to estimate what is the actual change in the real value, price changes have to be accounted for.
Per capita is merely the fact that the real GDP has to be divided amongst the population of the country. If a country’s national income has increased together with its population, we need to find the national income per person, GDP per capita where it is the total output per person, in order to determine whether average output levels have risen. If country A has both higher national income and higher populations compared to country B, the GDP per capita for both countries is required for a comparison of living standards to be made.
Material living standards can be measured by GDP and GNP. A country’s income level represents the ability of its residents to consume. The higher the income, the greater the potential level of consumption, hence, the higher the material living standards.
However there are problems in calculations and interpretation when using GDP per capita to measure the standards of living in a country. Calculations problem include data collection problems, underground activities and non-marketed activities. Interpretation problems include income distribution, composition of output, leisure and stress levels, negative externalities, differences in climate and intangibles.
Data collection problems occurs when mistakes arises due to the large numbers of firms and households to collect information from. This may be serious when there is widespread illiteracy. Without the ability to read or write, the residents are unable to fill in complicated forms to accurately declare their income. Economic activities in geographically inaccessible areas are also likely to be omitted because of the poor transportation and telecommunications infrastructure. This results in the standard of living in the country being understated.
Output that is non-marketed is not recorded in national income statistics even though they generate welfare for the society. For example, the value of ’do-it-yourself’ home renovation, home cooked meals and childcare provided by parents or relatives are not recorded. In developing countries, where there is much subsistence farming where people grow crops and rear animals for personal consumption, the size of the non-marketed economy can be quite substantial and the standard of living is understated.
Difference in climates across different countries may also cause the standard of living measured by GDP per capita to be less accurate. Countries in colder climates tend to spend more on clothing, insulation and heating. So while such expenditure raises national income, living standards is actually overstated as compared to countries with better climates as the latter arguably enjoys nicer and more stable weather throughout the year. Conversely, countries in the tropics probably spend more on air conditioning, which will overstate their living standards as compared to countries in more temperate regions.
As an economy grows, its people often end up working longer hours or working more intensively. Many jobs also change from being routine in nature to being more complex and challenging. With less leisure and greater stress, the rise in standard of living tends to be overstated by rises in national income. When comparing between countries, standard of living would be overstated for the country with relatively linger working hours, poorer work-life balance and more stressful work environment.
Although calculation errors could be minimized as the countries develops, currently there are no solutions. Underground and non-marketed activities could be estimated by the values of such activities but those estimates themselves are subjective and inaccurate. Data collection would only improve with time; hence currently there is no solution. Hence GDP per capita still has its problems and limitations in measuring the standards of living in a country. GDP per capita could only measure the material standard of living and is unable to measure the non-quantifiable aspects of the country standards of living.
There are other alternative ways to measure the standard of living in a country. Examples include healthcare indicators like life expectancy and infant mortality while examples of education indictors include literacy rates and proportion of the population having primary, secondary and tertiary education. Consumption indicators like the number of TV sets, refrigerators and telephone lines per capita are also commonly used. The human development index (HDI) comprises data on PPP adjusted GDP per capita, school enrolment, adult literacy and life expectancy. The idea here is that human development depends on the quantity of resources available to the people in the country, their ability to use the goods and services and the time they have to use these goods and services and the time they have to use these goods and services. Measure of economic welfare (MEW) comprises data on national income with allowances made for leisure, non-marketed output and the value of services contributed by existing consumer durables. Deductions are then made for “regrettables” such as expenditure on commuting to work, national defense, law enforcement, negative externalities and initial expenditure on consumer durables. While both approaches is quite comprehensive in its attempt to capture a wide range of factors affecting living standards, including the non- quantifiable aspects, estimating the monetary values of the various areas can be rather subjective.
In conclusion, while by using GDP per capita to measure the standard of living may have its limits, however, by using a uniformly accepted economic indicator of standard of living is arguably better than using economic indicators with differing and clashing opinions to compare across different countries. In fact, standards of living itself is hard to be defined clearly and thus GDP per capita with its uniformly accepted system may only be use to generalise the standard of living of different countries.