How reliable are National income statistics as a means of comparing living standards between countries?

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Q. How reliable are NY statistics as a means of comparing living standards between          

  countries?

[A Level 2003 Paper 3]

Ans.

National income statistics include Gross Domestic Product per capita as an indicator of the average living standards of the individual in a country.

Gross domestic Product is the value of total goods and services produced in an economy over a period of time. When this value is divided by the total population, GDP per capita is obtained.

However, the foremost problem of calculation of GDP is faced with is the problem of price fluctuations over time. Hence the money value of GDP or the nominal value of GDP must be adjusted with the changes in price level to arrive at the real GDP i.e. GDP at constant prices. A third statistic can be imputed to illustrate how much of the GDP is reliant on the changes of price.

This statistic is called the GDP deflater given by:

GDP at current prices (assume year 2003)     *100

GDP at base-period price (assume year 1990)

This would give the real GDP change that occurred since the base-period when economic conditions were stabile. The real GDP is then divided by the total population to arrive at the real capita that gives a more accurate measure of the income per person in country.

The process of calculations of Gross Domestic Product itself encounters problems. There are three methods of calculating GDP and each method is threatened with its own set of problems that can challenge the relative of the national income statistics.

Output method is one way of measuring GDP. In this method the total value of home-produced output is imputed. However it needs to be minded that one firm’s output is another firm’s inputs sometimes. Hence this method has the possibility of double counting wherein the value of the same output is taken twice. Therefore value added i.e. the amount of market value that each firm produces; is used to calculate value of output. This method avoids the statistical error of double counting.

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Also the self-provided goods and services such as gardening and housework are not taken account of. Public goods such as health, education are difficult to place a value on. Therefore these goods are normally given the value of their factor incomes.

Since self-produced goods are not accounted for and public and merit goods do not have absolute values, there stands an error in the national statistics as value of output is not entirely given.

The output approach also takes into account a highly volatile component, i.e. the value of stocks. Stocks are subject to price inflation and so ...

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