Question

In: Economics

GDP per capita is commonly used to compare well-being across countries, however it has its limitations....

GDP per capita is commonly used to compare well-being across countries, however it has its limitations. What is the potential impact of using GDP per capita as the only measure to compare well-being for people across different countries?

Solutions

Expert Solution

Using GDP as a measure of welfare has well-known problems which include courses covering the principles of macroeconomics among the first items. But the point of the Davos discussions is that those issues are even greater in the digital age. Traditional GDP figures ignore many of the advantages of the technology, so we need to reconsider how we calculate the well-being of the typical person.

For the distribution of goods GDP does not change. Instead, imagine two economies, but this time one has a dictator who gets 90 percent of what's made, and all the others barely subsist on what's left. In the second the distribution is much more equal. GDP per capita will be the same in both cases, but it's obvious which country I'd rather stay in.
Pollution costs are not calibrated to GDP. When two countries have the same GDP per capita but one has contaminated air and water and the other does not, well-being will be different but it will not be measured by GDP per capita.

The values behind GDP give no thought whatsoever to the fact that capital is not indestructible, and is in fact continuously depreciating. This leads to illogical circumstances such as the GDP rise that happens regularly in the wake of unexpected catastrophes. Natural disasters, for example, annually kill vast amounts of capital like facilities, transportation modes, houses and environmental infrastructure. Nevertheless, GDP only accounts for the actual reconstruction of this country, resulting in an increase in GDP equivalent to the level of destruction caused by the disaster.

The second major issue with using per capita GDP as a measure of quality of life is their dependence on monetary values and costs. One of the features of GDP per capita frequently heralded as a benefit over other metrics is the simplicity of the equation behind it, resulting in one supposedly objective and easy to obtain statistic that represents the average person's ability to buy goods and services in a community. For fact it is a much more complicated matter to reach GDP. Although many transactions in an economy have a clear price and a clear number, many of the day-to-day activities of an individual, such as household production or services, are far less clear


Related Solutions

1. When we compare GDP per capita across countries, we need to make sure that resources...
1. When we compare GDP per capita across countries, we need to make sure that resources in both countries are measured using the same units. Please concisely describe the process of translating nominal GDP measures across countries into measures of real resources in common units. 2. “Virtually all cross-country income differences observed can be explained by the cross-country differences in capital-per-worker (or per person) ratios.” Discuss the previous statement and please be concise, but precise, in your answer.
Using GDP per capita to compare living standards in different countries a. does not account for...
Using GDP per capita to compare living standards in different countries a. does not account for big differences in the distribution of income in these countries. b. overlooks the fact that China has a huge population and Norway is very small. c. is such a poor measure that economists do not use it anymore. d. shows you that America has the highest standard of living in the world. Owning stock in a company a. represents part ownership in the company....
Your friend argues real GDP per capita is a poor measure of economic well-being. He says...
Your friend argues real GDP per capita is a poor measure of economic well-being. He says the statistic fails to consider factors such as pollution and leisure. Provide a counter argument that defends the use of real GDP per capita as a welfare measure.
GDP is often used as a measure of well-being. Is it a reasonable measure of well-being?...
GDP is often used as a measure of well-being. Is it a reasonable measure of well-being? If so, why does Norway with its high standard of living have a relatively low GDP? Why do India and China, with their relatively low standards of living have some of the highest GDP in the world?
How does our production function explain differences in GDP per capita (y= Y/L) across countries? (Your...
How does our production function explain differences in GDP per capita (y= Y/L) across countries? (Your answer should include differences in capital per person and differences in productivity.)
All countries do not converge to the same level of per capita GDP as the United...
All countries do not converge to the same level of per capita GDP as the United States, Germany, and Japan. Discuss the reasons behind this.
Briefly discuss four (4) limitations of using GDP per capita as a measure of economic wellbeing....
Briefly discuss four (4) limitations of using GDP per capita as a measure of economic wellbeing. [10 marks]
“Convergence in growth rates and income per capita across the different countries is a necessary outcome...
“Convergence in growth rates and income per capita across the different countries is a necessary outcome expected by both the neoclassical Solow growth model and the endogenous growth theory. “Is this statement true? (Discuss the issue by giving references to the fundamental premises of these two theories). Looking at the real-life data, has the convergence hypothesis been validated in the world? Explain.
A study modeled the GDP per capita of 24 countries using the variables Regulation Index, an...
A study modeled the GDP per capita of 24 countries using the variables Regulation Index, an index of Ethnolinguistic Diversity, International Trade as a share of GDP, Primary Education rate in %, and 1988 GDP/Capita. Parts of the regression output are shown below. Dependent variable is: GDP/Capita s = 2102 Source Sum of Squares df Mean Square Fratio Regression 2,740,849,111 5 548,169,822 124 Residual 79,502,035 18 4,416,780 Variable Coefficent SE Coeff T-ratio Intercept 10,744.5 9425 1.14 Regulation Index -1334.98 615.2...
It is found that the real GDP per capita of developing countries grows faster than developed...
It is found that the real GDP per capita of developing countries grows faster than developed countries at the same period. Explain this phenomenon in the light of diminishing returns to capital.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT