Real GDP inadequate to measure the standard of living?

Real GDP is increasingly criticised for its alleged failure to adequately measure the standard of living. To what extent do you think this criticism is valid?


Economist use real GDP to show the Standard of living in a country. However it was increasingly criticised for its failure to perfect measure. The standard of living. In this Assignment. I would like to describe GDP, components of GDP, GDP growth. Real GDP, the standard of living As well as I would like to discus briefly why Real GDP failure of Real GDP to Adequate measures the Standard of living.

What is GDP?

Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time.

This definition might seem simple enough. But, in fact, many subtle issues arise when computing an economy's GDP. Let's therefore consider each phrase in this definition with some care.

GDP adds together many different kinds of products into a single measure of the value of economic activity. To do this, it uses market prices. Because market prices measure the amount people are willing to pay for different goods, they reflect the value of those goods.

GDP also includes the market value of the housing services provided by the economy's stock of housing. For rental housing

When International Paper makes paper, which Hallmark then uses to make a greeting card, the paper is called an intermediate goods and the card is called a final good. GDP includes only the value of final goods. The reason is that the value of intermediate goods is already included in the prices of the final goods. An important exception to this principle arises when an intermediate good is produced and rather than being used, is added to a firm's inventory of goods to be used or sold at a later date. In this case, the intermediate good is taken to be “final” for the moment, and its value as inventory investment is added to GDP.

GDP includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, and doctor visits). When you buy a CD by your favourite band, you are buying a good, and the purchase price is part of GDP.

When you pay to hear a concert by the same band, you are buying a service,

And the ticket price is also part of GDP.

GDP includes goods and services currently produced. It does not include transactions involving items produced in the past. When General Motors products and sells a new car, the value of the car is included in GDP. When one person sells a used car to another person, the value of the used car is not included in GDP.

GDP measures the value of production within the geographic confines of a country. When a Canadian citizen works temporarily in the United States, his Production is part of U.S. GDP. When an American citizen owns a factory in Haiti, the production at his factory is not part of U.S. GDP. (It is part of Haiti's GDP) Thus, items are included in a nation's GDP if they are produced domestically, regardless of the nationality of the producer.

GDP measures the value of production that takes place within a specific interval of time. Usually that interval is a year or a quarter (three months). GDP measures the economy's flow of income and expenditure during that interval.

Components of GDP

Spending in the economy takes many forms.GDP includes all of these various forms of spending on domestically produced goods and services.

To understand how the economy is using its scarce resources, economists are often interested in studying the composition of GDP among various types of spending.

To do this, GDP is divided in to four components: consumption (C), investment (I) , Government purchases (G), net exports( X )and import (M),



Consumption is spending by households on goods and service “goods” include household spending on durable goods, such as automobiles and appliance, and nondurable goods, such as food and clothing.

“Service” includes such intangible items as haircuts and medical care. Household spending on education is also including in consumption of service.

Investment: (I)

Investment is the purchase of goods that will be used in the future to produce more goods and service. It is the sum of purchases of capital equipment, inventories, and structures. Investment in structures includes expenditure on new housing.

Government Spending (G)

The government sector tracks what the government actually spends money on. Government purchases of goods and services include stealth bombers, government-funded research, space shuttles, salaries, and toasters. Many of these items are seldom sold in markets; as a result, they are valued at the price the government pays for them.

Net Exports:

Net exports equal the purchases of domestically produced goods by foreigners (exports) minus the domestic purchases of foreign goods (imports). A domestic firm sale to a buyer in another country.
Types of GDP and GDP growth:

There are two types of GDP

a) Nominal GDP:

Nominal GDP is the sum of quantities of final goods produced times their current price .

b) Real GDP:

Real GDP inflation-adjusted measure that reflects the value of all goods and services produced in a givenyear, expressed in base-year prices. Often referred to as "constant-price", "inflation-corrected" GDP or "constant dollar GDP". Real GDP can account for changes in the price level, andprovide a moreaccurate figure.

Real GDPx100


As we have seen, GDP measure the total spending on goods and services in all markets in the economy. If total spending rises from one year to the next, one of two things must be true: (a) the economy is producing a larger output of goods and service. Or (b) goods and services are being sold at higher prices .When studying changes in the economy over time, economist want to separate these two effects. In particular, they want a measure of the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services.

Real GDP shows how the economy's overall production of goods and services changes over time.(N.Gregory,p206-213)
The Standard of living

The benchmark for measuring the standard of living in a country is to use real national income per capita. This is found that dividing real national income (GDP or GNP) by the total population.

The chart below shows data on per capita gross domestic product for the UK since 1970. The data is expressed in dollars.

To make a cross-country comparison of living standards, we need to express the data in a common currency (nearly always the US dollar). In the chart above we see a fall in per capita GDP in 1993. This was not because the British economy was in recession - indeed the economy enjoyed a recovery in output and incomes in this year. The reason for the dip in per capita income (measured in US dollars) was that the pound fell sharply against most other currencies (following our departure from the exchange rate mechanism). This reduced the value of UK national output when measured in another currency.

The strong pound since 1996 has had the opposite effect - boosting the UK's position in the international living standard league.

Differences in living costs between countries

Adjustments can also be made for variations in price levels and the average cost of living between countries by expressing the figures using estimates for purchasing power parity. However fluctuations in the exchange rate can affect the accuracy of the figures. And, there is no guarantee that each country measures national output and incomes with the same degree of accuracy.
Alternative indicators when measuring living standards

To come to a general judgment on living standards within an economy we can use a range of alternative indicators

These could include:

Ownership of consumer durables such as televisions, dish washers, home computers

Estimates of pollution levels.

Measures of social welfare (see below) Home ownership levels and other indicators of household wealth


o the number of patients per doctor - a measure of health provision in a country

o hospital waiting lists for important operations

o the number of children per thousand of the population who die each year (infant mortality rates)

o the average food intake per person (measured by average calorific intake)

o the proportion of the population that can read or write - literacy rates

o average educational attainment at different age levels

o crime rates

o divorce rates

These statistics should indicate what proportion of the population is enjoying a minimum standard of living although perceptions of what is needed for a basic quality of life vary widely. (Source :

Factors affect standard of living:

The standard of living is measured on how much disposable income each family has left over. If money is tight and the family can barely make ends meet then their standard of living is low.

Some factor that can impact on standard of living,

Number of people in the household, Personal debt level, Income of the household, location of the house, Housing market, Interest rates both savings and mortgage, price of all daily goods, State income and Tax rates of local property.

Also Standard of living can be affected by Political/Legal Factor, Economic Factor the microeconomic and the macroeconomic ) , Social/Cultural Factor and Technological Factor ,

Political/Legal Factor:

Firm will be directly affected by the action of government and other political event. These might be major event affecting the whole of the business community, such as collapse of communism, war ,or a change of government, or may be action affecting just one part of the economy .Similarly business will be affected by the large firm work in which they operate , such as industrial relation legislation governing pricing in the privatised industries and lows preventing collusion between firms to keep prices up.

Economic Factor:

The microeconomic: This includes all the economic factor that are specific to a particular firm operating in its particular market.

the macroeconomic: This is the national international economic situation in which business as a whole operates, business in general will do much better if the economy is growing than if is in recession ,

Social/Cultural Factor:

This includes social attitudes and values, such as attitudes towards working condition, the length of the working day, equal opportunities and the use and abuse of animals and image portrayed in advertising. Thus trends have had a big impact on the action of business and the image that May firms sick to present.

Technological Factor:

They have a huge impact on the way firm produce products, but also on how business is organised .The use of robots and other firms of computer controlled production has changed the nature of work for many workers. It has also created rapid communication and a wide range of opportunities. For this reason people be unemployed and decreased income which directly impact on standard of living.

List of countries by GDP (real) Growth Rate:

2007 List by the International Monetary Fund[1]

2007 List by the World Bank[2]

2008 List by the CIA World Factbook[3]



GDP (millions of USD)↓

Flag of WorldWorld

54,584,918[4] Union


1 States






4 (PRC)


5 Kingdom












GDP (millions of USD)↓

Flag of WorldWorld



Real GDP is failure to adequate measure of the Standard of living:

GDP per capita is often seen as an indicator of living standards. Most people take it for granted that a country with a high GDP per capita is better off than a country with a low GDP per capita, and this is generally true. An increase in GDP per capita implies;

An increase in employment and incomes .An increase in output and hence, an increase in economic welfare.

However, GDP per capita is not a direct increase of living standards and quality of life in a country, so policies aimed at maximising GDP may be seen as ill-conceived. This is due to many reasons, including;

Renewable finite resource:

Most of country may grow rapidly by exploiting their non-renewable finite resources such as oil and forests. They may also over- exploit resources which renew slowly, such as fish and wildlife. While current living standards may be high, those of future generations may be jeopardised. Therefore, GDP is unable to act as an indicator of future welfare. For example; the fishing industry in Europe is currently facing many problems as a result of over fishing in the past. This has had a significant impact on the GDP of European countries.

GDP measures the total value of output produced, but it cannot distinguish between the effects of different types of output on living standards. For example; two countries have the same GDP per capita, but country A has a well-funded education and health system, whereas country B has a well-equipped army. It is obvious that country A will have higher living standards than country B, but this is not apparent from their GDP figures.

Old and Child Care:

According to John (2006), he states about the old and child care in the following way:

‘If you care for your parents when they're old and enfeebled, it doesn't contribute to GDP, but if you pay someone else to care for them, it does contribute. The same goes for childcare and mental illness. The act of caring for the permanently sick, however compassionate that may be, is a use of resources for no tangible gain. Therefore, it does not contribute to GDP'

For these reasons, some people prefer to use other indicator to measure a country's standard of living. These social indicators take non-economic factors into account, such as literacy rate, and life expectancy. Some examples are the physical quality of life index (PQLI), the Human Development Index (HDI), and the Basic Well-being Index (BWI)'. (John Sloman. 6th edn , 2006).

Underground economy:

Oliver (2006) in his book ‘Macroeconomics' states about the underground economy as follows:

‘Underground economy is the part of economic activity not measured in official statistics, either because the activity is illegal, or because firms and workers would rather not report it to avoid paying taxes - is an old issue in Spain'. (p 45)

Black market:

Michael & Charles (1993) describes that everybody wants to take advantage of a carpenter's, car mechanics, or painter's, offer to do some work without a receipt. Agents engage in the black, or underground, economy for straight-forward reasons. First, they want to avoid taxes (the value added tax, employment and social security charges, profit taxes). Another reason is that criminal activities, such as drug dealing, prostitution, or racketeering, are obviously better kept underground .(p24)

Different countries may have different sizes of informal/ ‘black' economy (e.g. crime, subsistence farming, drug dealer, and bartering and cash payments) and this is not taken into account by those who calculate GDP. GDP will therefore underestimate the actual value of output. For example; Russia has a very large black economy, so its relatively small GDP is a poor indicator of actual income and living standards. ( Source:John Sloman, 2006, 6th ed,)


Oliver (2006) states that unemployment is the number of people who do not have job but are looking for one. It directly effects on the welfare of the unemployed. Although unemployment benefits are greater today than they were during the great Depression, unemployment is still often associated with financial and psychological suffering. It is not the question how much suffering depends on the nature of the unemployment. Real GDP is failure to measure unemployment of a country.

The Inflation Rate:

Oliver (2006) states that

‘Inflation is a sustained rise in the general level of prices in the economy-called the price level. The inflation rate is the rate at which the price level increases. (Conversely, deflation is a sustained decline in the price level. It corresponds to a negative inflation rate)'.

If the price level increase nothing happened for the rich people but something happened for the poor people. As example, some Asian Country there GDP is high, price of goods is also high, and the rich people can easily buy the goods because there income is high. But poor people which income is low they can't buy the goods. The real GDP mean per people per capital so real GDP can't measure the inflation rate which mean Standard of living.


Environment is very important part of Standard of living. But this important part is polluted in many ways. Industry is produce lot of product. On the other hand, at the same time industry is throwing wastage or rubbish, smoke and useless chemicals. It is polluting environment by motor and vehicles which making sound and air pollution. Climate change is a big factor for standard of living. Power station and chemical plant which cause global warm and for that reason why some countries like Maldives and south part of Bangladesh going down under water. Also High GDP per capita might be accompanied by high levels of pollution and exploitation of the workforce, thus causing a decrease in living standards which is not reflected in GDP figures. Therefore, GDP may overestimate living standards in a country. Here real GDP can't measure Standard of living. ( Source :John Sloman, 2006)


Leisure is important for every age. By growing GDP people going to be like machineries. People are all time busy for their earning money to build up their life. They don't have time for entertainment like cinema, game, party also there is not enough leisure centre where people can go easily. When people not involved with recreation to have proper leisure, it is not even mentionable whether the current GDP is high or low in the country. So, real GDP fails to measure the Standard of living.


Population is a big impact of standard of living. Most of third world county has been suffering of this problem (Bangladesh, India, and Pakistan). If the population increase GDP automatic decrease as a result standard of living of county go down. Real GDP can not solve the countrymen problem.

Inequality wealth

GDP per capita is not an indicator of the distribution of wealth, because when GDP increases, this extra wealth may be received by only a small section of society with the rest of society even worse off. For example; the GDP of oil producing countries like Saudi Arabia is very high, but the wealth is only shared among a small minority of citizens, while the majority of citizens living relative poverty. (John Sloman, 2006)


GDP discusses how economists measure the total growth of a nation. At this point it is important to know about how the GDP is doing in the change of standard life style. It is already assumed that real GDP shows the total amount of growth in value in specific year. Economist can predict what to achieve and what is the difference in achievement by the end of the year. As we have seen that real GDP is countable by the value, it is easy to know for any people to predict what further contribution needed in the country. But whatever the economist prediction is, the economic factors should be remain same. Without the economic factors stability, the total development of the country is not possible.


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