Question

List three (3) factors that limit the usefulness of real GDP per person as a measure of the standard of living . Then discuss how these factors affect real GDP per person as a measure of living standards .

Answer 1

Real GDP is the mkt value of all final goods and services within the domestic territory of a country in a year (expressed in base year price).

Real GDP per person is the ratio of real GDP and total population.

Std of living includes all such elements which can be purchased or not but increases happiness of people.

It is assumed that increase in GDP also increase welfare of society and thus std of living also enhances.

But while calculating GDP we include such items which negatively affect living std Or we exclude such items which contributes positively to living std.

Following are 3 factors that limit the use of real gdp as std of living measure:

1) Inclusion of harmful goods

GDP includes income earned by all types of goods whether essential or harmful.

Income earned from Goods like cigratte ,liquor etc are included in gdp butbsuch goods never brings happiness nor improves std of living.

2) Non monetary exchanges are ignored

while calculating gdp non monetary exchanges like services given by mother are not included.

such services does not demand money but contributes a lot to raise the living std .

3) Externality

These are cost or benefit enjoyed by third party not directly involved in the activity.

GDP does not include externality(positive & negative).Externality plays a major role in raising or decreasing living std.For e.g factory installed near residential area will create health hazards and as a result expdt on medicines will increase.

This will increase consumption expdt and gdp will also increase.But living std does not improves.

So,above 3 factors limit the usefulness of real gdp as measurement of std of living.

Above factors affect real gdp as measure of living std because when we include harmful goods in the calculation of goods produced we ignore harmful results related to health of people ,their damaged social life etc.Thus, it does not show decrease in living std of people.

If we include non monetary exchanges ,living std will also be clearly shown with increase in real gdp.These exchanges involves emotions like food cooked by housewife brings happiness and improves living std .But we cant measure value of such transactions ,so they are not included.

Externalities are both positive ( benefit) and negative (cost) .Positive improves living std like surfaced road constructed in nearby area bring conveneince in society people. Negative externality like pollution caused due to vehicles will create health issues and expdt on detergent will increase ,This will increase gdp but living std decreases.

Thus ,above 3 factors affect in both ways ( positive & negative)to real gdp as measure of living std .