Also the self-provided goods and services such as gardening and housework are not taken account of. Public goods such as health, education are difficult to place a value on. Therefore these goods are normally given the value of their factor incomes.
Since self-produced goods are not accounted for and public and merit goods do not have absolute values, there stands an error in the national statistics as value of output is not entirely given.
The output approach also takes into account a highly volatile component, i.e. the value of stocks. Stocks are subject to price inflation and so the actual value must be imputed. Stock appreciation is necessary to arrive at accurate GDP.
GDP can also be calculated using the income approach. Income approach carries problem because the country’s total personal income is not relevant to GDP because personal incomes include transfer payments that are not factor incomes and hence does not contribute to GDP. Therefore from the national income transfer payments must be deducted while undistributed corporate income, which is a factor income, and trading surpluses of nationalized industries must be added to arrive at a more reliable GDP value.
The third method of calculation involves the expenditure method that private consumption spending, investment spending, government spending and net exports.
While imputing GDP by this method only the final expenditure should be accounted for and transfer payments must be excluded. The factor cost of the output is relevant and hence indirect taxes must be deducted and subsidies that cover private firms’ costs must be added to arrive at the actual value of the output. The value of exports must be added while imported finished goods and raw materials should be deducted.
Adjustment to measurements of GDP may enable national statistics to be more reliable. However output values also include the incomes that flow out of the country and incomes that flow into the country. Hence Gross National Product is another statistic that sometimes replaces GDP as the norm of calculating national income.
This is because GNP takes into account the income the permanent residents of the country earn irrespective of their geographical location. Another improvement to measurement of national income is Net National Product that is found by deducing depreciation or capital consumption of the economy from the GNP value.
Over time though GDP or the other measures prove to be unreliable due to some factors which the GDP value cannot reflect. For example leisure activities are an important aspect for higher standards of living but GDP does not include this. However the extent of leisure as a component of living standard can vary between countries. For example Japan has a higher GDP per capita and the people have longer hours of working so lesser leisure time but they do not consider this as a field in their standards of living. However an average person in UK would consider less leisure time in favour of long working hours as a fall in his living standards. Therefore NY statistics sometimes become invalid due to difference in opinion.
GDP also does not reflect the income distribution and the source of output that contributed to the increase in value of total output. If income distribution is fairly unequal and goes to richer people rather than poorer or middle-class group then the average person of the country is not actually better-off.
It is also that if the rise in output was say in defense by producing more military equipment then an average person is barely better-off. In fact an increase in education, inoculation, awareness programs, health facilities i.e. goods that whose benefits cannot have a monetary value attached will actually make the people better-off. Since these aspects cannot entirely be placed into the national income statistics the information becomes less reliable.
It is also that a large part of the people in the economy may be working into the informal sector. The black economy is motivated by tax evasion, strict health and safety rules, illegal migrants working. Nonetheless this part contributes this part contributes to the national income but goes unaccounted for, and so the measurement becomes unreliable.
To measure living standards between countries problem arises because the national income of one country must be converted into the currency of another country.
But exchange rates are largely dependant on the international trading and hence carry little relevance to the domestic currency’s purchasing power within the country.
Therefore an adjustment is made to the exchange rate in relation to the inflation rates of the respective countries so that the actual purchasing power could be found. This is called the purchasing parity.
It is also that the countries whose comparisons are made have different populations, population density, needs and country size and location because of which living costs differ.
For example Sweden is colder than Italy and hence must spend more on fuel. However this spending is not exactly making an average Swede better-off than an Italian. France is a comparatively larger country than UK and have relatively lesser people living in urban areas than congested as population density is comparatively low to the UK, even if France’s GDP per capita is lower than the UK. Therefore living standard cannot be compared.
Externalities such as pollution affect living standards but pollution can neither be given an absolute value nor can it be given in a discrete way. It is hard to figure to what extent economics are affected by pollution and hence the people’s are living standards cannot be entirely given.
Social indicators are also important in measuring standard of living. Crime rates, social protection and security, human rights, political stability, religious tolerance are important factors in measuring living standards.
Income per person may be high or moderate in a country but unless these features are not present on average person is barely better-off.
Foreigners’ status in different countries is important and must be accounted for to estimate living standards. For example, in France it is illegal to carry out statistics on the ways of living of foreign immigrants. Therefore the statistics on living standards become weak as the real condition and of problems these people are unknown and cannot be improved effectively.
It is also that income disparity and living standards vary largely between different ethnic groups and immigrants of a country. For example, in Zurich it was found that British, America and European residents get a much higher income than the Swiss average whereas migrants from Somalia, Eastern Europe and Bangladesh earn much lower than the Swiss average and live in congested areas. These situations make comparisons of living standards between countries difficult.
Due to the existence of different cultures, locations, extent of black economy, national income accounting conventions, needs and price levels comparison between countries become unreliable.
