Real GDP divided by the size of the population, or GDP per capita, reflects the average amount of GDP each individual gets and provides a measure of the standard of living within an economy. In general, it is assumed that the higher GDP per capita in a country, the higher the standard of living because more goods and services are available to each person.
There are limits to the above conjecture, as by definition, measures of real GDP exclude unofficial transactions or unpaid activities such as housework or leisure that increase welfare. These exclusions of non-market activities would under-record the level of GDP. As a result, a shift from non-market to market services would cause an increase in measured GDP due to the increase in the size of the market sector of the economy. Similarly, real GDP figures could understate true living standards due to the existence of the black market whose transaction are too difficult to measure and as a result, are not included in the measure of real GDP.
Only taking into account material items such as income or ownership of consumer goods, another drawback of real GDP per capita is the possibility that market prices may not reflect social costs of production and thus may fail to measure other aspects of welfare such as quality of living. For example, greater factory output will cause greater air pollution or overcrowding but real GDP would not take their harm into account and would only measure the positive income of production to the economy. A major oil spill could potentially add to real GDP per capita because a clean up operation would consume the services of many pollution experts and companies; in reality, however, this accident would harm well being. Much of what is produced within an economy might be regarded of little or no benefit or may be produced and not be sold, yet it would accounted for in real GDP per capita, increasing its value and intrinsic well being. In this case, real GDP per capita would increase social welfare whilst in reality, these factors would reduce it.
Not taking into account how welfare is distributed, another real GDP per capita limitation is its failure to deal with the unequal distribution of income between the rich and the poor. Divisive and distasteful for society, this status gap is completely disregarded by real GDP per capita calculations and it thus causes the intrinsic welfare factor to be unreliable.
Finally, there is no indication to the extent real GDP per capita may cause personal “happiness” or an individual’s social welfare. It is impossible to measure that individual happiness or dissatisfaction based on having more or less goods, because material goods are not everything and because various aspects of life are important to different individuals. As a result, it is hard to state with certainty the definite impact of a larger real GDP per capita on individuals.
Most statistics figures contain inherent flaws due to the manner in which they are compiled and due the fact that they are averages; the same principle holds true for real GDP. Despite, statisticians continue compiling data as it provides a rough indication of reality. Thus, despite real GDP’s per capita many inaccuracies in reflecting economic and social welfare, its indication of the general state of the economy and links and comparison to the six macroeconomic aggregates may provide economists with useful indications of the economic situation.
Bibliography:
Chalkley, M. and Smith P. (1997). „GDP and the feel-good factor“. Economic Review 1997: 15(1).
Gordon, Robert J. Macroeconomics. 8th ed. USA: Addison Wesley Longman Inc., 2000.
"Gross Domestic Product". Microsoft® Encarta® Online Encyclopedia 2002
http://encarta.msn.co.uk © 1997-2002 Microsoft Corporation.
Oswald, A.J. (1997). „Happiness and economic performance“. Economic Journal 1997: 107.
Pentecost, Eric. Macroeconomics: An Open Economy Approach. London: MacMillan Press Ltd., 2000.
"Standard of Living". Microsoft® Encarta® Online Encyclopedia 2002
http://encarta.msn.co.uk © 1997-2002 Microsoft Corporation.
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"Gross Domestic Product," Microsoft® Encarta® Online Encyclopedia 2002
Begg, David; Fischer, Stanley; Dornbusch, Rudiger pp. 512
"Gross Domestic Product," Microsoft® Encarta® Online Encyclopedia 2002
Begg, David; Fischer, Stanley; Dornbusch, Rudiger p. 361
Chalkley, M., and Smith P. (1997), „GDP and the feel-good factor“ p.2
Chalkley, M., and Smith P. (1997), „GDP and the feel-good factor“ p.2
