Limitation of Using Gdp to Measure Standard of Living

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Although national income is a convenient way for measuring the standard of living between countries, it still has its limitations.

Firstly, as national income statistics are calculated from millions of different returns to the government, inevitably mistakes are made. For example, returns may be inaccurate or simply not completed. This makes the data incorrect, hence hindering people to analyze the living standard of a country accurately.

Secondly, National income does not record the output produced by “hidden economy”. Taxes such as VAT, income tax and National insurance contributions, and government regulations such as health and safety laws, impose a burden on workers and businesses. Some are then tempted to evade taxes and work in the black economy. For instance, in the building industry, it is common for workers to be self-employed and to not declare their income to the tax authorities. As the size of the hidden economy is difficult to estimate and calculated, national income statistics often underestimate the true size of national income and the standard of living of a country.

Thirdly, national income does not record the subsistence economy. For many developing countries, such as China, people grow and eat on their own products. A large part of the production of the agricultural sector is not traded and therefore does not appear in national income statistics. Hence the value of nominal output in reality is much higher. Again, national income statistics underestimates the true size of national income and the standard of living of a country.

Apart from national income, health indicators can also measure the standard of living between countries. From table 6, it can be seen that the under-five mortality rate, per thousand of the population in Tanzania is 15 times greater than USA. It means that the childcare in Tanzania is poorer and lacked development, leading to a lower standard of living. Take life expectancy at birth as another example,...
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