Evaluate the usefulness of GCP as a measure of living standards compared to other methods.

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Evaluate the usefulness of GCP as a measure of living standards compared to other methods.

        One of the main uses of national income data is in measuring the economic well being of the population through the concept of the standard of living. The basic standard for this is to use GDP per person (per capita). But GDP per capita does have some limitations when assessing the standard of living.

        Firstly GDP does not take into account for the natural inflation; if inflation is not taken out of the equation then the GDP will overestimate the living standards of a countries population. This is the case because for example if a piece of machinery breaks down after use and a company buys a new one, inflation would have increased the price. So using GDP this would view this as an increase in the standard of living for the population which quite obviously is not the case. A better way to measure living standards would be to use real GDP which removes the factor of inflation and so give out a more realistic figure.

        Also GDP figures on their own do not show the distribution of income and the uneven spread of financial wealth but show an average. Incomes and earnings may be very unequally distributed among the population and rising national prosperity can still be accompanied by rising relative poverty. So by using GDP you may be hiding the differing extremes in a country.

        There are certain things that are difficult to measure using any statistical approach to living standards; these are also not reflected in GDP statistic. The GDP does not take into account social problems in the community, and even though the statistics may be showing an increase in income, the social problems may be reducing the quality of life and living standards of the people. For example, we can see divorce rates have increase significantly over the past 4 decades. Also there may be increased stress, alcoholism and suicide rates, and all these have negative effects on living standards. Also increases in GDP and so “living standards” may also be accompanied by an increase in pollution and other negative externalities which have a negative effect on living standards which the GDP does not take into account. GDP figures also tell us little about the quality of goods and services produced, which has a major effect on living standards. For example say you purchased a laptop 2 years ago for £1000, and another person purchased a £1000 laptop today. GDP would say that both of the people had the same quality of life, but as we know that the two goods are not homogenous and that the quality differs, which affects standards of living.

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        Also Investment. Capital Investment into a firm or an economy provides the opportunity for development, expansion, research, and possible higher levels of Productivity. This ties in with the second, Technological Advances. These lead to the availability of better equipment, which improve the manufacturing of goods or services, or help to create better ways of managing jobs and people. Investment can also be stretched to link with the third factor, Education and training. Education and training work to make people more productive and effectively, act as investments into what is known as ‘Human Capital’. These three interlinked factors have significant effects ...

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