Why is GDP per capita useful as a measure of living standards? What are the limitations of GDP per capita as a comparable measure of living standards?
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...
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