Introduction, Definitions, and Approach to Essay
This Economics essay discusses if economic indicators are the best way of measuring standards
of living in a country. One such economic indicator is Gross Domestic Product. What is Gross Domestic Product (GDP)? Nominal GDP is defined as the nominal money value of all
final goods and services produced by factors of production located domestically within a country,
over a given time period, usually a year.
Nominal GDP is often converted to real GDP, which measures the level of real output in an economy. Real output refers to the actual physical
amount of goods and services produced, whereas in contrast nominal output refers to merely the
money value of the goods and services produced.
Per
capita refers to the fact that real GDP has to be divided amongst the population
of the country, so that it represents the output per person in a country.
Why is this important? If a country’s national income has increased together with its
population, we need to determine the national income per person, GDP per capita, the total output per person, in order to determine whether average
output levels have actually risen. This is important because if Country A has both higher real national income and a larger population compared to Country B, the real GDP per capita for both countries
is required for a fair and justifiable comparison of material living standards to be made.
What are material living standards? Material
living standards can be measured by economic indicators such as GDP and GNP (Gross National Product), where a country’s income level
represents the ability of its residents to consume goods and services. The higher the national income, the
greater the potential level of consumption, hence, the higher the material
living standards.
Calculation and Interpretation Problems
However, there are problems in calculation and interpretation when using real GDP per capita
to measure the standards of living in a country.
First, the calculation problems in this respect include
data collection problems, underground activities that are not recorded in GDP due to illegality and other reasons, and non-marketed activities which are not recorded in GDP.
Secondly, interpretation problems include income distribution, composition of output,
leisure and stress levels, negative externalities, differences in climate and
intangibles.
All these will be discussed in this Economics paper.
Data Collection Problems
First, data
collection problems occur when mistakes arise due to the large numbers of
firms and households that governments need to collect information from. This problem may be particularly serious in Less Developed Countries (LDCs) because of possible widespread illiteracy. Without the ability to read or write, some residents in LDCs are unable to fill in forms to accurately declare their
income.
This is often compounded by the problems of geography and inaccessible locations. Economic activities in geographically-inaccessible areas are also
likely to be omitted because of poor transportation and telecommunications
infrastructure, resulting in the standard of living in that particular country being
understated, because these activities might raise the standard of living but simply cannot be measured or collected in the form of usable data.
"Underground" and Non-marketed Output
Furthermore, output
that is non-marketed is not recorded in national income statistics even though
they generate welfare for society. For example, the value of DIY (do-it-yourself) furniture, and DIY renovation, home-cooked meals, mothers' love, and childcare provided by
parents or relatives are not recorded, while they contribute to standard of living.
Also, particularly in developing countries (LDCs) such as some countries in Sub Saharan Africa, where there is often much subsistence farming, where people can grow crops and often rear animals for personal
consumption, the size of the non-marketed economy can be quite substantial and
the standard of living could be massively understated.
Differences in Climate and Weather
Also, differences in climate across different countries may also cause the standard of living
measured by real GDP per capita to be less accurate, because countries in colder climates
tend to spend more on clothing, insulation, and heating. Thus, while such
expenditure raises real national income, their living standards are actually overstated as
compared to other countries with better climates as these other countries spend less on clothing, insulation, and heating. Conversely, countries in the
tropics also probably spend more than temperate countries on air conditioning, which will overstate their
living standards as compared to countries in more temperate regions.
Stress and Other Intangibles
As
an economy develops, people often end up working longer hours or more
intensively. Many jobs also change from being routine to being more
complex. With less leisure and greater stress, the rise in
standard of living tends to be overstated by rises in national income. When
comparing between countries, the standard of living would possibly be overstated for the
country with relatively longer working hours, with poorer work-life balance, and possibly a more
stressful work environment.
However, let's go one step further. Although
calculation errors could be minimised as countries develop, currently
there are few feasible solutions. Underground and non-marketed activities could be
estimated by the values of such activities but those estimates are
subjective and inaccurate. Hence GDP per capita still has its problems and
limitations in measuring the standards of living in a country. GDP per capita
could only measure the material standard of living and is unable to measure the
non-quantifiable aspects of the country standards of living.
Alternative Ways of Measuring Standard of Living
On the other hand, economic indicators that measure material standard of living are not the only means of measuring standard of living. There
are also other alternative ways to measure the standard of living in a country.
Various Other Development Indicators
Examples include specific development indicators such as healthcare indicators, like life expectancy and infant
mortality rates, while examples of education indicators include literacy rates and
proportion of the population having primary, secondary, and tertiary education levels.
Consumption indicators like the number of TV sets, refrigerators and telephone
lines per capita are also commonly used.
HDI and MEW
Two famous alternative indicators are discussed here - HDI and MEW.
The Human Development Index (HDI) concept, originally suggested by research from the famous economist Amartya Sen, comprises data on PPP-adjusted GDP per capita, school enrolment, adult literacy, and life expectancy. The central economic idea here is that human development depends on the
quantity of resources available to the people in the country, their ability to
use the goods and services and the time they have to use these goods and
services and the time they have to use these goods and services.
Measure of Economic Welfare (MEW) comprises data on national income, with allowances made
for leisure, non-marketed output, and services contributed by
existing consumer durables. Offsetting deductions are made for “regrettables”, such as
expenditure on commuting to work, national defence, law enforcement, negative
externalities, and initial expenditure on consumer durables.
While both
approaches, HDI and MEW, are quite comprehensive in their attempt to capture a wide range of economic and non-economic factors affecting society's living standards,
including the non- quantifiable aspects, estimating monetary values of some areas can be rather subjective and spurious, although this is a salutary corrective already.
Conclusions
In conclusion, while by using GDP per capita
to measure the standard of living may have its limits, however, by using a
uniformly accepted economic indicator of standard of living is arguably better
than using economic indicators with differing opinions, standpoints, philosophies, and perspectives to compare
across different countries. In fact, standards of living itself is hard to be
defined, and thus GDP per capita with its uniformly accepted system may
only be used to generalise the standard of living of different countries.
