Gross Domestic Product (GDP)

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Is gross domestic product an accurate measure of the standard of living?  Why or why not?

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Gross Domestic Product (GDP) is not a good measurement of a citizenry’s quality of life or standard of living, nor is it intended to serve that purpose. GDP is a measurement of the total value of goods and services produced by an individual country within that country’s borders. In other...

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Gross Domestic Product (GDP) is not a good measurement of a citizenry’s quality of life or standard of living, nor is it intended to serve that purpose. GDP is a measurement of the total value of goods and services produced by an individual country within that country’s borders. In other words, in contrast to discussions of Gross National Product, which used to dominate these types of discussions and which includes the value of goods and services produced by a country’s citizenry anywhere or everywhere in the world, GDP is literally confined to what is produced within specified national boundaries.

A country can have an enormous GDP but a citizenry that is not enjoying the fruits of its labors depending upon the distribution of wealth. The United States and China have the largest GDPs in the world, but many people argue that wealth distribution in these two countries restrict the benefits of national economic power to a small elite, with middle- and lower-classes dropping further and further behind despite the sizes of their countries’ economies. That means that measurements of GDP do not necessarily correlate to standards of living.

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Trying to relate gross domestic product to standards of living is a bit like comparing apples and oranges—it can't be done because they are two completely separate things.

Gross domestic product (GDP) talks about the total value of the goods and services produced in a country during the course of a year. Standard of living, on the other hand, refers to how a country's residents live. It looks at matters such as whether families have enough money to survive, whether everybody has access to medical care and how safe residents of the country are on a day to day basis. It is very possible for a country's GDP to be rising exponentially with little or no improvements to the daily lives of people who are unemployed or marginalized.

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Gross domestic product (GDP) in its most basic form is a very poor measure of the standard of living.  Even in its more refined forms, it is not a very accurate measure of standard of living, at least not for everyone in a country.

In its most basic form, GDP only measures the gross output of a country.  This is not a very good measure of the standard of living at all because it does not take into account the size of the country.  For example, using GDP, we say that China has the second largest economy in the world.  But it would be foolish to say that China’s people have the second highest standard of living.  This is because China has so many people that its GDP is bound to be large even if standards of living are not.  Therefore, it is much more accurate to use GDP per capita to measure standard of living.  This at least takes into account the number of people in an economy.

However, even GDP per capita is not very accurate.  The main reason for this is that it does not capture any sort of information about income inequality in a country.  If we say that the US GDP per capita is about $50,000, we are not capturing the fact that some people make millions while others live in poverty.  GDP cannot tell us what the standard of living of the typical person in the United States is because it cannot tell us how much variation there is in income. 

GDP has another shortcoming if you consider quality of life to be part of standard of living.  GDP does not measure how happy we are with our lives.  It does not measure, for example, the value of having vacation time.  It does not measure the value created when a parent stays home and cares for their children.  It can only measure the monetary value of the goods and services that are created and sold.

In these ways, GDP is not a very accurate measure of standard of living.

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