A friend tells you that the GDP of China is seven times the GDP of Australia. Does this mean that China’s economic welfare is better than Australia?

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In short, no, not necessarily. GDP and economic welfare are two very different things. In order to understand the answer to your question, it is important to understand what these two terms refer to. The simple definition of GDP, or gross domestic product, is a measure of economic activity. It can also be defined as the sum of the market value of goods and services produced in an economy during a given period of time. Usually, that period of time is quarterly or annually. So essentially, it's the monetary value of all goods and services—it's the size of an economy (this refers to the economy of a country as a whole).

While GDP refers to economic productivity, economic welfare refers to the standards of living within a country. Unlike GDP, there isn't a cut and dry definition for economic welfare, as it can include many factors. It can include anything that refers to a country's living standards; such as the number of doctors, access to and quality of healthcare, literacy rates, housing availability, life expectancy, and education. Whether the GDP of a country is big or small, economic welfare refers to how GDP is able to affect citizens in a positive way.

A country can have a huge economy and still have a fair amount of poverty and lack access to services. Conversely, a country can have a much smaller economy and have a high living standard. There are some official ways to measure economic welfare, such as the MEW (Measure of Economic Welfare) and the HDI (Human Development Index). Also, looking at a country's GDP per capita and its basic social services programs, such as education and healthcare, can give you a quick way to compare the living standards of countries. To put this in perspective for the countries in question: GDP per capita in China is less than $9,000. GDP in Australia is over $53,000. China was 89th on the HDI in 2017, while Australia was 3rd.

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Gross Domestic Product, or GDP, attempts to measure the total value of all goods and services produced over a specific time period. It is far from a perfect metric, as it cannot measure informal economies and often excludes the value of domestic labor. If a man works as a paid housekeeper, for example, or hires a housekeeper to clean his own house, that contributes to GDP, and yet if he stays home and cleans his own house and raises his own children, the identical labor is not counted as part of GDP. Nonetheless, GDP is a useful way of comparing the rise and fall of economic activity from year to year or quarter to quarter.

Using raw GDP to compare different countries is more complicated. For example, Liechtenstein, with a population of 37,286, will obviously produce far fewer goods than China, with a population of 1,384,688,986 people, but by other measures, Liechtenstein is a very prosperous country.

While China has a population of 1,384,688,986, Australia's population is 24,758,772. In comparing GDP, one sees:

  • Australia: 1,343.6 billion US dollars in 2017
  • China: 12,015 billion US dollars in 2017

However, this misses the crucial difference in population size. If one looks at per capita (per person) GPD, one finds

  • Australia: 48,806 US dollars in 2017
  • China: 14,400 US dollars in 2017

Thus, once one factors in the differences in population, these GDP numbers mean that Australia ranks far higher in productivity and also in average personal income and economic welfare.

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