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

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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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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