Question

Suppose there are two countries that have the same nominal GDP. Do they have the same standard of living? Why or why not?

Scenario 2: Suppose there are two countries and nominal GDP in one country is twice as large as the other country. Do they have the same standard of living? Why or why not?

Answer 1

1) No , having the same nominal GDP can't be considered as a reason for having the same level of standard of living due to the following reasons

* Population of the two nations will be different. Therefore, percapita GDP will be different. For example, they have a nominal GDP of 1 Millon dollar , population of first nation is 100 , then percapita GDP is 1000 dollar. On the other hand,if the second nation has a population of 10000 then it's percapita GDP will be 100$

* Percapita real GDP is percapita GDP adjusted for inflation. Inflation levels in two countries may also different. This, percapita real GDP will be different.

A generally accepted measure of standard of living is GDP percapita, especially real GDP percapita. Here, it's clear that standard of living will be different in the two countries.

2) ln the second scenario also, we can't say that , the two countries have the same standard of living.

* Country which has a nominal GDP twice the size of another country may have a small population. Then percapita income of that country will be too high. On the other hand, second country may have a high population, then it's percapita income will be too small

* Similarly, inflation levels may differ in two countries, leading to a vast difference in real GDP percapita.

If the population of the country with larger nominal GDP is also twice larger than the other country, then both of the countries will have the same percapita GDP. If inflation rate also remains the same, we can say that , they have the same standard of living. But standard of living also takes into account, other aspects like wealth. Thus, in today's world, same standard living between countries is a rare phenomenon.