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Real GDP is increasingly criticized for its alleged failure to adequately measure the standard of living. To what extent do you think this criticism is valid?

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  • November 28, 2007
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REAL GDP IS INCREASINGLY CRITICIZED FOR ITS ALLEGED FAILURE TO ADEQUATELY MEASURE THE STANDARD OF LIVING. TO WHAT EXTENT DO YOU THINK THIS CRITICISM IS VALID?

Gross Domestic Product (GDP) is defined by John (1999) as the total market value of all the final goods and services produced within a nation's borders in a given time period. Each goods and services produced and brought in the market has a price. The price of the total output is called as GDP. It can be measured by either cumulating all the income earned in the economy or all the spending in the economy and both measures should roughly equate to the same total. Real GDP is the total GDP has been adjusted to remove the effects of inflation. This allows one to compare GDP figures and changes from one country to another other time and thus evaluates what a country's economy is actually worth in terms of particular year's product prices.

In nowadays, real GDP is widely used by policymakers, economists, international agencies and the media as the primary scorecard of a nation's economic health and well-being. People believe that the standard of living is closely tied to the real GDP. This generally signifies that the economy is wealthier and producing more, individuals are better off, and that living standards are higher. However, people more recently argue that real GDP in certain circumstances could not fully represent people's standard of living. In this essay, I am going to examine the extents in detail by analyzing the real GDP from different perspectives. However, the essay will mainly address the limitation of real GDP to show that real GDP could not represent the correct value of the economy; therefore it may not adequately measure the standard of living.

Real GDP only includes the total domestic production of an economy and the output of some goods and services are unrecorded, which in the long run results understate the total real GDP. We can view this problem from national and international...