“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.
WJR