Gross Domestic Product (GDP) measures the monetary value of final goods and services produced in a given year by factors of production within a country. GDP reports are released on the last day of each quarter, reflecting the previous quarter. Therefore, it is measured on a quarterly basis and measures the level of economic growth in different countries. GDP is commonly expressed as an international currency and is useful because it is widely known, easily calculated and provides a useful statistic for comparison. These figures can help us determine whether a nation’s economy has experienced economic growth or recession through nominal GDP.
The major advantage of using GDP per capita as an indicator of living standards is because it is used widely, frequently and consistently. It is measured widely as GDP is available for most countries in the world, allowing comparisons to be made. It is measured frequently as most countries provide GDP data on a quarterly basis, allowing trends to be seen quickly. It is measured consistently as GDP is relatively consistent among countries.
GDP is divided by the population of a country to obtain GDP per capita, the amount available to the average person to spend. GDP per capita is a good indicator of living standards, as a rise in GDP per capita signals a growth in the economy and an increase in living standards as people are spending more. GDP per capita is more effective than GDP when measuring living standards as total GDP may not be distributed amongst the population, leading to no improvement of the standard of living of the average citizen.
National input, output and expenditure are generated by the activity of households and firms, through the circular flow of income, which measures GDP. Households provide factors of production (land, labour, capital and enterprise) to firms, whilst firms provide goods and services for households. The factors of production earn an income that contributes to the national income. Land receives rent, labour receives wages, capital receives interest and enterprise receives profit. Households pay for goods and services using the income they receive from selling their factor of production. The output generates income, which is spent on the output. This is the circular flow of income. National income = national output = national expenditure, so the equality of income and output shows the link between productivity and living standards.
Although GDP is used widely, frequently and consistently, there are limitations of GDP per capita as a comparable measure of living standards. GDP is divided by the population to estimate living standards of the citizens in a particular economy; however, the welfare of the society could be an inaccurate reflection as GDP per capita is merely an average. Economic inequality, the gap between the rich and the poor, consists of disparities in the distribution of income within a population. As GDP per capita is a mean value, it does not demonstrate income distribution. Therefore, each citizen will receive different amounts of GDP depending on their economic status and how much income they gain. If the GDP of a country increases, people would naturally think that the standard of living has increased and people are spending more. However, if there has been a natural disaster in a country, a lot of money would be spent on the damages and infrastructure. This would ultimately lead to a rise in the GDP, but the standard of living for the population would decrease from the damage of the disaster. Additionally, a society with longer working hours (LEDC) will have a higher GDP, but less leisure time and not necessarily greater well-being
Alternatively, a society with a more even income distribution will have a greater level of well-being. Generally, LEDCs, who have...