Question

1. Since the end of the Civil War, real GDP per capita in the United States has grown at roughly
2 percent per year. Some scholars argue that the true standard of living for Americans has
increased faster than 2 percent per year, while others believe that standards of living have
increased more slowly than 2 percent per year. What types of arguments are used to justify
a higher or lower rate in the increase in the standard of living than that indicated by real
GDP per capita? Where do you stand on this issue, and why?

Answer 1

Real GDP/Capita equals to the sum of total output or total real income generated divided by the number of population. This ratio believes that on an average what is the real income that an individual is getting. Therefore it is an average and not the actual income that an individual is getting in the real world. In other words, suppose total real income is $100 and the number of individuals in the country is 10. So Real GDP/Capita becomes 100/10 i.e. $10 per individual. But if out of 10, 8 individuals’ sum of incomes are 20 and remaining 2 individuals’ sum of income is 80 then on an average 8 individuals’ per capita income becomes (20/8 i.e. $2.5 per individual) and remaining 2 individuals’ per capita income becomes 80/2 i.e. $40 per individual.

We can see from above that some people are better off and some are worse off. Thus Real Income/ Capita is an average value and not the exact value that an individual is getting. It does take into account the distribution of income or the level of poverty in the country.    

So both arguments in the questions are correct. Some people could be better off and some could be worse off.