Because it does not tell how evenly the GDP is distributed among people, per capita GDP is an imperfect indicator of a country’s level of living….
What makes real GDP per capita such a bad economic indicator?
The most popular justifications for continuing to use GDP per capita as a measure of quality of life are essentially justifications for rejecting any viable alternatives. One of the major flaws with GDP per capita is that it does not take into account social inequality.
Give examples and explain why per capita GDP is merely an imperfect estimate of a country’s standard of life.
GDP is a metric that measures an economy’s total output, or the total worth of all the goods and services that a country generates. However, it does not track how that production is dispersed as money and benefits to the country’s citizens, nor does it track how those commodities and services affect living standards. GDP has traditionally failed to account for the negative consequences of production, such as pollution and damage to the environment, worker injuries and health, resource depletion, and so on.
In general, we see a high correlation between GDP per capita and quality of life indexes around the world. Countries with higher GPD per capita have higher living standards. More commodities and services tend to lead to improved living levels.
However, two countries with similar high GDPs per capita may have significant differences in wealth inequality and public services: one country may levy higher taxes on its very wealthy citizens, which are then used to fund social programs that reduce poverty and improve public health and education, resulting in a more equal quality of life for its entire population. The other country may have lower taxes on its rich inhabitants, but it spends less on poverty and public health programs as a result, leading to increased inequality and a lower quality of life for the majority of its citizens. Another typical example is pollution caused by economic production: a country or state with a large number of oil refineries may be able to increase GDP at the expense of increased air pollution and lower quality of life.
GDP measures the entire amount of the pie, but not how the pie is divided up, which is a fair way to think about this relationship. Access to healthcare, education, career possibilities, environmental cleanliness, ability to achieve personal goals, crime rate, and treatment of persons who are unable to work, such as the elderly or people with disabilities, are all factors that influence standard of living.
Is real GDP per capita a perfect indicator of standard of living?
The GDP is the total production of goods and services produced within a country’s borders in a given year. Inflation and price rises are removed from real GDP per capita. Real GDP is a stronger indicator of living standards than nominal GDP.
Why is GDP incorrect?
Living standards have risen all throughout the world as a result of economic expansion. Modern economies, on the other hand, have lost sight of the reality that the conventional metric of economic growth, gross domestic product (GDP), just measures the size of a country’s economy and does not reflect the welfare of that country. However, politicians and economists frequently use GDP, or GDP per capita in some situations, as an all-encompassing metric for measuring a country’s progress, combining economic success with societal well-being. As a result, measures that promote economic growth are perceived as positive for society.
We now understand that the reality is more complicated, and that focusing just on GDP and economic gain as a measure of development misses the negative consequences of economic expansion, such as climate change and income inequality. It’s past time to recognise GDP’s limitations and broaden our definition of development to include a society’s quality of life.
This is something that a number of countries are starting to do. In India, for example, where we both advise the government, an Ease of Living Index is being developed to gauge quality of life, economic ability, and sustainability.
Our policy interventions will become more aligned with the qualities of life that citizens actually value, and society will be better served, if our development measures go beyond an antagonistic concentration on increased productivity. But, before we try to improve the concept of GDP, it’s important to understand where it came from.
The origins of GDP
The contemporary idea of GDP, like many of the other omnipresent things that surround us, was born out of battle. While Simon Kuznets is frequently credited with inventing GDP (after attempting to quantify the US national income in 1932 in order to comprehend the full magnitude of the Great Depression), the present concept of GDP was defined by John Maynard Keynes during WWII.
Keynes, who was working in the UK Treasury at the time, released an essay in 1940, one year into the war with Germany, protesting about the insufficiency of economic statistics in calculating what the British economy might produce with the available resources. He stated that the lack of statistics made estimating Britain’s capacity for mobilization and combat problematic.
According to him, the sum of private consumption, investment, and government spending should be used to calculate national income. He rejected Kuznets’ version, in which the government’s income was represented but not its spending. Keynes observed that if the government’s wartime purchase was not factored into national income calculations, GDP would decline despite actual economic expansion. Even after the war, his approach of measuring GDP, which included government spending in a country’s income and was driven by wartime necessities, quickly gained favor around the world. It is still going on today.
How GDP falls short
However, a metric designed to judge a country’s manufacturing capability in times of conflict has clear limitations in times of peace. For starters, GDP is an aggregate measure of the value of goods and services generated in a certain country over a given time period. There is no consideration for the positive or negative consequences produced during the production and development process.
For example, GDP counts the number of cars we make but ignores the pollutants they emit; it adds the value of sugar-sweetened beverages we sell but ignores the health issues they cause; and it includes the cost of creating new cities but ignores the worth of the crucial forests they replace. “Itmeasures everything in short, except that which makes life worthwhile,” said Robert Kennedy in his famous election speech in 1968.
The destruction of the environment is a substantial externality that the GDP measure has failed to reflect. The manufacturing of more things increases an economy’s GDP, regardless of the environmental damage it causes. So, even though Delhi’s winters are becoming packed with smog and Bengaluru’s lakes are more prone to burns, a country like India is regarded to be on the growth path based on GDP. To get a truer reflection of development, modern economies need a better measure of welfare that takes these externalities into account. Expanding the scope of evaluation to include externalities would aid in establishing a policy focus on their mitigation.
GDP also fails to account for the distribution of income across society, which is becoming increasingly important in today’s world as inequality levels rise in both the developed and developing worlds. It is unable to distinguish between an unequal and an egalitarian society if their economic sizes are identical. Policymakers will need to account for these challenges when measuring progress as rising inequality leads to increased societal discontent and division.
Another feature of modern economies that makes GDP obsolete is its disproportionate emphasis on output. From Amazon grocery buying to Uber cab bookings, today’s cultures are increasingly driven by the burgeoning service economy. The concept of GDP is increasingly falling out of favor as the quality of experience overtakes unrelenting production. We live in a society where social media provides vast amounts of free knowledge and entertainment, the value of which cannot be quantified in simple terms. In order to provide a more true picture of the modern economy, our measure of economic growth and development must likewise adjust to these changes.
How we’re redefining development in India
In order to have a more holistic view of development and assure informed policymaking that isn’t solely focused on economic growth, we need additional metrics to supplement GDP. Bhutan’s attempt to assess Gross National Happiness, which takes into account elements including equitable socioeconomic development and excellent governance, and the UNDP’s Human Development Index (HDI), which includes health and knowledge in addition to economic prosperity, are two examples.
India is also started to focus on the ease of living of its population as a step in this approach. Following India’s recent push toward ease of doing business, ease of living is the next step in the country’s growth strategy. The Ease of Living Index was created by the Ministry of Housing and Urban Affairs to assess inhabitants’ quality of life in Indian cities, as well as their economic ability and sustainability. It’s also expected to become a measurement tool that can be used across districts. We feel that this more comprehensive metric will provide more accurate insights into the Indian economy’s current state of development.
The ultimate goal is to create a more just and equitable society that is prosperous and provides citizens with a meaningful quality of life. How we construct our policies will catch up with a shift in what we measure and perceive as a barometer of development. Economic development will just be another tool to drive an economy with well-being at its core in the path that society chooses. In such an economy, GDP percentage points, which are rarely linked to the lives of ordinary folks, will lose their prominence. Instead, the focus would shift to more desirable and genuine wellbeing determinants.
What is the difference between nominal and real GDP?
The total value of all products and services produced in a specific time period, usually quarterly or annually, is referred to as nominal GDP. Nominal GDP is adjusted for inflation to produce real GDP. Real GDP is a measure of actual output growth that is free of inflationary distortions.
Why is per capita GDP a more accurate indicator of a country’s wealth than overall GDP?
Per capita GDP, in its most basic form, indicates how much economic production value can be assigned to each individual citizen. Alternatively, as GDP market value per person may also be used as a measure of affluence, this translates to a measure of national wealth.
Why is GDP the most accurate indicator of economic growth?
GDP is significant because it provides information on the size and performance of an economy. The pace of increase in real GDP is frequently used as a gauge of the economy’s overall health. An increase in real GDP is viewed as a sign that the economy is performing well in general.
Why is GDP PC a valuable indicator of a society’s standard of living?
Economic policy requires the measurement of living standards. However, there are various obstacles in assessing living standards in practice, therefore we may use a variety of different measurements.
The most commonly used indicator of living standards is real GDP per capita.
World Map of GDP per Capita
GDP per capita is a metric that quantifies national output and income. The average income per person in the economy is referred to as per capita income. Because it measures average salaries / the quantity produced in an economy, this is an approximate approximation to living standards. Income and average output, on the other hand, are merely an approximate pointer to living standards. (For example, higher GDP per capita may come at the expense of increasing pollution; in this scenario, higher GDP may result in a drop in living standards.)