Task : Why might Blackpool – as a tourist destination – be considered to have a more acute problem with the Black economy than other similar sized towns ?
Changes in the Composition of Real GDP Could be Misleading
Real GDP may have risen, suggesting that individuals are better off, however, the increase in real GDP could in fact be due to increases in government spending necessary to target increased social problems. For instance, the country could be facing a huge increase in crime – lowering standards of living. However, the increased spending on the police force, legal system and prison system could have raised the overall real GDP. Thus, the government has had to increase spending on so-called regrettables providing a misleading picture of higher living standards.
Distribution of Income
Real GDP per capita may have risen, but this does not necessarily mean that the majority of the population are better off. Income distribution could have worsened. For instance real GDP per capita could have increased from $ 15,000 to $ 17,000 per capita – however, the vast majority of the population may not have experienced any change to real incomes. The rise in real GDP per capita could be due to a significant rise in earnings for the top income earners in a country. This can be shown in the Lorenz curve
Task: Draw a Lorenz Curve and illustrate how a worsening of income distribution can be shown.
Thus, most of the population have not enjoyed any improvement in their living standards, again illustrating how potentially using real GDP data can be misleading.
Changes to Quality of Life Factors
Real GDP may well have increased, but due consideration needs to be given to quality of life factors. There is more to the standard of living than just the ability to buy material possessions ( ie real spending power ). Individuals may be able to purchase a greater quantity of goods and services, but another important consideration as to the standard of living are non-materialistic factors. These could be anything from work stress levels, crime rates, job security, life expectancy, access to cancer treatment, access to public parks, airborne pollution, seawater quality, litter etc. If these have taken a serious turn for the worse, it is more difficult to assume that an increase to real GDP automatically transmits to a higher standard of living.
Task: Identify three other possible quality of life factors that could be said to be influential in the assessment of the standard of living.
Quality of Goods and Services
Even if the real GDP per capita was to stay the same it could be argued that the standard of living has improved, as naturally overtime the quality, technology and performance of products and services improves: milk stays fresher for longer, heating boilers are more energy efficient, VCRs have more advanced features ( for the same price ), there is now more viewing choice on television etc.
Task: Identify two other examples of product quality improvements.
Why is comparing living standards between countries so difficult ?
Two countries may have exactly the same real GDP when converting their national incomes into a common currency, but may have differing living standards. For instance:
Country A real GDP = $ 20,000
Country B real GDP = $ 20,000
Living standards could be different because:
• Accuracy of national income data collection could vary between countries, one country for instance could have a much larger black economy of unreported economic activity.
• Income distributions could be vastly different. Country A could have an even distribution, so all individuals are thought to have a fairly reasonable standard of living, as they have a reasonable purchasing power. Whereas country B could have heavily skewed incomes, with a small minority generating most of the income. In fact a majority of the population could be relatively poor and only be able to afford basic necessities. Thus living standards appear vastly different.
• Quality of life factors could be vastly different. One country may have to work on average 45 hours per person per week to achieve $ 20,000 real GDP per capita, whereas the other country only has to work 36 hours for the same national income. Alternatively, one country may have lower crime rates, divorce rates, less of a drug problem, less air pollution etc.
• Composition of GDP could be vastly different. Country A may be allocating 30 % of all real GDP to national defence, whereas country B may allocate just 5 %. In the former country’s case, there will be significantly less resources for consumers to spend on goods and services – and arguably they could have a lower standard of living.
• However, the main problem is the fact that converting real GDP into a common currency can be misleading – it may not reflect the real purchasing power in each country. This is because the prices in one country relative to another may be very much higher so quite literally $ 1 in country B may not be able to buy the same amount of goods in country A – because B has higher prices. In this case country B would have a lower real purchasing power. Therefore, given the same $ amounts, individuals in country A would be better off, as they could buy a greater physical quantity of goods and services and hence would have a higher standard of living. Thus, using the official exchange rate to obtain a $ real GDP for each country can be misleading.
