Discuss the extent to which gross domestic product (GDP) is a useful measure of living
standards and economic development. [25]
GDP measures the value of the total output of an economy. GDP/capita is a way of estimating
domestic incomes and is seen as a measure of living standards. Living standards are the degree of
material and non-material wealth available to people within a country. economic development is a
macroeconomic aim that acknowledges the importance of not only economic growth but the extent
to which this growth bene ts all in an economy. Economic development is generally simultaneous
with an increase in living standards.
Real GDP (GDP adjusted for in ation) is used to measure economic growth. Economic growth is
seen as an indicator of increased living standards as it suggests that there is higher incomes within
an economy. For example, the countries with the highest real GDP’s such as the G7 are seen as the
countries with the highest standards of living. Developing countries with low real GDP growth rates
are generally characterised by poverty.
Furthermore, economic growth is a prerequisite for economic development; it cannot occur unless
there has been economic growth.
However there are some limitations to this as a measure of living standards and development. First,
in order to compare development between countries - which is necessary to understand standards of
living - purchasing power parity must be considered. This is a way of measuring real exchange rates
to understand real GDP per capita. For example, if the nominal GDP/capita in Country A is 50,000
but in country B it is 40,000, at face value, country A seems to have a higher living standard.
however, say the PPP exchange rate between the two is 0.8. When we adjust country B to this, real
GDP/capita becomes 32,000. This suggests that Country B has a stronger purchasing power, ie, they
can purchase more goods at a lower cost and therefore, the standard of living is likely to be higher
in Country B.
Second, real GDP/capita is not the only indicator of living standards. For example, Kuwait has one
of the highest real gdp/capita yet due to immigrant workers who receive low wages, this is not
re ected equally across the economy. Therefore income equality is an important indicator of
economic development derived from growth. This can be measured using the Lorenz curve and gini
coef cient. the closer the Lorenz curve is to the line of equality (45 degrees), the lower the Gini and
the greater the income equality. If there is great income equality, economic growth will likely
represent an increase in economic development and thus living standards.
A part of the HDI includes life expectancy and education as indicators of living standards as well.
Whilst there is a correlation between GNI/capita (PPP) and HDI value, there are some outliers
which suggest that income is not the only necessary composite for development. For example,
Singapore has a very high GNI/per capita (PPP), greater than Norway which was placed rst on the
hDI in 2018 (Singapore was 9th). This was because, Norway had a greater life expectancy and
expected ad mean years of schooling.
It is also important to consider the type of economic growth that has taken place. Actual economic
growth is an increase in GDP in response to an increase in aggregate demand. It represents a
positive output gap and is not sustainable. If this was the cause of economic growth, economic
development is unlikely to increase. This is because whilst nominal GDP may rise, the in ationary
pressure created would erode the value of money. Potential economic growth however would result
in sustainable growth and development. Sustainability is an important aspect as it means that the
economic growth experienced today will not diminish the economic growth future generations can
experience.
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standards and economic development. [25]
GDP measures the value of the total output of an economy. GDP/capita is a way of estimating
domestic incomes and is seen as a measure of living standards. Living standards are the degree of
material and non-material wealth available to people within a country. economic development is a
macroeconomic aim that acknowledges the importance of not only economic growth but the extent
to which this growth bene ts all in an economy. Economic development is generally simultaneous
with an increase in living standards.
Real GDP (GDP adjusted for in ation) is used to measure economic growth. Economic growth is
seen as an indicator of increased living standards as it suggests that there is higher incomes within
an economy. For example, the countries with the highest real GDP’s such as the G7 are seen as the
countries with the highest standards of living. Developing countries with low real GDP growth rates
are generally characterised by poverty.
Furthermore, economic growth is a prerequisite for economic development; it cannot occur unless
there has been economic growth.
However there are some limitations to this as a measure of living standards and development. First,
in order to compare development between countries - which is necessary to understand standards of
living - purchasing power parity must be considered. This is a way of measuring real exchange rates
to understand real GDP per capita. For example, if the nominal GDP/capita in Country A is 50,000
but in country B it is 40,000, at face value, country A seems to have a higher living standard.
however, say the PPP exchange rate between the two is 0.8. When we adjust country B to this, real
GDP/capita becomes 32,000. This suggests that Country B has a stronger purchasing power, ie, they
can purchase more goods at a lower cost and therefore, the standard of living is likely to be higher
in Country B.
Second, real GDP/capita is not the only indicator of living standards. For example, Kuwait has one
of the highest real gdp/capita yet due to immigrant workers who receive low wages, this is not
re ected equally across the economy. Therefore income equality is an important indicator of
economic development derived from growth. This can be measured using the Lorenz curve and gini
coef cient. the closer the Lorenz curve is to the line of equality (45 degrees), the lower the Gini and
the greater the income equality. If there is great income equality, economic growth will likely
represent an increase in economic development and thus living standards.
A part of the HDI includes life expectancy and education as indicators of living standards as well.
Whilst there is a correlation between GNI/capita (PPP) and HDI value, there are some outliers
which suggest that income is not the only necessary composite for development. For example,
Singapore has a very high GNI/per capita (PPP), greater than Norway which was placed rst on the
hDI in 2018 (Singapore was 9th). This was because, Norway had a greater life expectancy and
expected ad mean years of schooling.
It is also important to consider the type of economic growth that has taken place. Actual economic
growth is an increase in GDP in response to an increase in aggregate demand. It represents a
positive output gap and is not sustainable. If this was the cause of economic growth, economic
development is unlikely to increase. This is because whilst nominal GDP may rise, the in ationary
pressure created would erode the value of money. Potential economic growth however would result
in sustainable growth and development. Sustainability is an important aspect as it means that the
economic growth experienced today will not diminish the economic growth future generations can
experience.
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