Explain How Economists Measure Living Standards In an Economy and Discuss The Possible Uses Which Could Be Made Of This Information

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Explain How Economists Measure Living Standards In an Economy and Discuss The Possible Uses Which Could Be Made Of This Information

        There are several ways in which economists measure living standards. These include measuring and comparing real GDP per capita, using the Human Development index, The Living Standards Measurement survey, comparing economic growth rates and using the Index of Human Poverty. Each of these methods has its own advantages and disadvantages and have many uses, such as for comparing living standards among countries and for determining levels of aid to give to countries as explored in this essay.

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        The World Bank and the United Nations’ Standard National Accounts uses a quantitative approach to measuring living standards by comparing both real GDP per capita of countries and their economic growth. This is the commonest approach. Countries can be ranked according to their real GDP per capita. This value is worked out by using GDP = consumption + Investment + Government spending + (exports – imports). This figure is converted to per capita by dividing by the population size so as to take into account the size of population. To remove the problem of inflation making comparing GDP per capita inaccurate the monetary data is used as the indicator of living standards. This is done using the consumer price index. Countries below GDP $370 per capita are said to be in absolute poverty. This information is useful in that the data produces a quantitative result that can relatively easily be collected and the results can be compared between different countries. However its use as an exact measure of living standards is bought into question. The figure does not consider the distribution of income in a country; it doesn’t include unrecorded activity (e.g. grey market and subsistence) and fails to include environmental degradation. It fails to consider the types of good and services produce. For example, increases in the production of capital goods and military goods will raise GDP per capita but may well deduce living standards as the opportunity cost of such production is the consumer goods forgone.

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GNP per capita in some countries is worth more to the individual than other countries, mainly due to exchange rates. As a result another similar method used to compare standards of living is to use international prices. This means comparing the purchasing power parity, which means using a common currency a comparing what you can buy for that money in each country. Therefore if money goes further in a country then the standards of living should be higher than indicated by real GDP per capital. For example Nepal is ranked 125th in the world for GDP per capita ($210). However ...

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