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

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Introduction

What are the limitations of GDP as an indicator of comparative living standards between countries over time? Gross Domestic Product (GDP) shows the total value of goods and services provided within a country and is compared with other countries to try an estimate a comparative standard of living. However there are many problems comparing national income between countries; ? Income figures for each country are likely to be in different currencies and so will need to be converted into a common currency, deciding on an exchange rate can be difficult as the rate changes frequently. ? ...read more.

Middle

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. ...read more.

Conclusion

? 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. ...read more.

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