What are the limitations of GDP as an indicator of comparative living standards between countries over time?

? Different countries have different accounting techniques so total income may be

calculated differently.

? A country may have a lower income than another but they may also have lower prices

(for example consumer goods), in this situation the price level will need to be taken into

account.

? Weather and climate also play a big factor, some countries in a warm climate won't

spend as much money on heating as a country in a cooler climate.

? Government spending will differ from country to country, this may be on defence,

investment or consumer goods.

? Some countries economies are more open to bartering and have big black markets than

others and the distribution of income is likely to vary.

GDP is often measured by real GDP per capita =

However this encounters the following problems;

? Goods and services which are not traded ( goods which are swapped and bartered for in

an economy) are ignored.

? Distribution of income cannot be measured. GDP per capita is an average figure, some

people may be extremely rich, others extremely poor.

? It doesn't take into account what goods countries are producing. One country may be

producing capital goods which involves less consumption but suggests future growth

whereas another country may be producing consumer goods which will have high

consumption now but less in the future.

? Prices differ over time. Computers have gone down in price which may reduce the

national income but the quality of computers has greatly improved.

? Economic "bads" may increase the figure of GDP but the quality of life may be

decreasing. For example if a country suffers from trafic jams then consumption of petrol

will increase and will increase the output of the economy but the jams will decrease

quality of life.

? Government spending such as defence and the health service has no market price so we

assume the value of these services are the cost in which we provide them. However this

may not be the case.

? If we take longer holidays and work less hours, output will fall lowering GDP however

we would probably enjoy a better quality of life.

There are also other methods of calculating quality of life such as;

? Adult literacy

? Life expectancy

? Doctors per 1000 people

? Infant mortality

For all the above reasons GDP alone is not a very accurate measure of the standard of living

between countries.