Question

Discuss the merits and disadvantages of GDP as a measure of a nation's standard of living. Think of a country that has a lower GDP but perhaps a higher standard of living than the United States, and compare the two. How can we reconcile these two statistics?

Answer 1

Answer

Gross Domestic Product (GDP) is an economic measurement that takes into account the value of all final goods and services produced in an accounting year.

Merits of GDP as a measure of a nation's standard of living

Indicator of economic performance- The GDP is measured by aggregating the value of all final goods and services produced within a nation in an accounting year. Thus, it helps in determining which sector of the economy (agriculture, industries, services) is contributing most to the economic growth. And which sector needs improvement to contribute significantly to the economic growth.

Wide acceptance- The GDP as measure of economic well-being is widely used all over the world. Policy makers and economists often rely on the GDP to evaluate the performance of various economic agents (households, firms, government, finance institutions). And thus, are able to access their welfare state.

Facilitates easy determination of nation’s standard of living – The per capita GDP is one of the important measurements that explains the standard of living of economic agents. It can be easily calculated by dividing GDP by total population of the nation.

Thus, it can be concluded that GDP acts as a vital tool to evaluate a country’s standard of living.

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Disadvantages of GDP as a measure of a nation's standard of living

The quality of output remains unfocused- GDP is a quantitative measure of goods and services produced in an economy. It only tells the volume of output produced and not its qualitative aspect. If goods/services are not produced within the minimum standards and guidelines,then it will lead to poor quality of goods/services, compromising the country’s standard of living.

Non market transactions are excluded- Activities such as household tasks (cooking, cleaning), voluntary efforts (donations, charities), and contribution of natural resources (flood control, prevention of soil erosion, rain) are not included in GDP computation. As a result, GDP leads to misinterpretation of economic performance and thus its standard of living.

Fails to address social development- Every economy must have adequate level of nutrition, health, education, access to safe drinking water, sanitation, housing, etc. GDP fails to address all these social aspects of well-being. And thus, is an inadequate measure of economy’s standard of living.

Ineffective tool to measure sustainable development- When an economy grows in such a manner that needs of current generation are satisfied without compromising the needs of future generations. Then that economic growth leads to sustainable development. GDP fails to take into consideration this aspect of development.

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Say a country A has lower GDP but higher standard of living than the United States.

This suggests that per capita GDP in the US might be high, but it is unevenly distributed among the people. This implies that there exists inefficient allocation of resources, unfair distribution of income, and thus high level of poverty and inequality in the US.

While on the other hand, per capita GDP in the country A might be low. But its higher standard of living implies that people have equal access to resources, adequate level of health, education, assets, and fair distribution of income.

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Thus, it can be concluded that GDP only depicts growth of the economy in quantitative form. Where as standard of living measures the development of the economy in the qualitative form.

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