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Gross Domestic Product

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GDP is an economics term. It stands for Gross Domestic Product and is basically a measure of the value of goods and services produced in an economy in a year. It's therefore a pretty good indicator of the wealth and economic development of a country. Developed countries typically have high GDPs and developing countries typically have low GDPs.

Income earned abroad, such as overseas investments or loans, is not counted in GDP, but it is counted in a country's Gross National Product (GNP).

GDP per Capita

Actually, it is better and more common to talk about GDP per capita. 'Per capita' just means 'for every head', so GDP per capita is the total GDP for a country divided by the population of that country. This is a better indicator of wealth because it tells you how much wealth is enjoyed by each person1.

An Indicator of Living Standards?

GDP per capita is often seen as an indicator of living standards. Most people take it for granted that a country with a high GDP per capita is better off than a country with a low GDP per capita, and this is generally true. An increase in GDP per capita implies:

  • An increase in employment and incomes

  • An increase in output and hence, an increase in economic welfare

However, GDP per capita is not a direct measure of living standards and quality of life in a country, so policies aimed at maximising GDP may be seen as ill-conceived. This is due to many reasons, including:

  • Different countries may have different sizes of informal/'black' economy (eg, crime, subsistence farming, bartering and cash payment) and this is not taken into account by those who calculate GDP. GDP will therefore underestimate the actual value of output.

    For example: Russia has a very large black economy, so its relatively small GDP is a poor indicator of actual income and living standards.

  • GDP per capita is not an indicator of the distribution of wealth, because when GDP increases, this extra wealth may be received by only a small section of society with the rest of society even worse off.

    For example: The GDP of oil-producing countries like Saudi Arabia is very high, but the wealth is only shared among a small minority of citizens, while the majority of citizens live in relative poverty.

  • High GDP per capita might be accompanied by high levels of pollution and exploitation of the workforce, thus causing a decrease in living standards which is not reflected in GDP figures. Therefore, GDP may overestimate living standards in a country.

  • Some countries may grow rapidly by exploiting their non-renewable finite resources, such as oil and forests. They may also over-exploit resources which renew slowly, such as fish and wildlife. While current living standards may be high, those of future generations may be jeopardised. Therefore, GDP is unable to act as an indicator of future welfare.

    For example: The fishing industry in Europe is currently facing major problems as a result of over-fishing in the past. This has had a significant impact on the GDP of European countries.

  • GDP measures the total value of output produced, but it cannot distinguish between the effects of different types of output on living standards.

    For example: Two countries have the same GDP per capita, but country A has a well-funded education and health system, whereas country B has a well-equipped army. It is obvious that country A will have higher living standards than country B, but this is not apparent from their GDP figures.

  • If you care for your parents when they're old and enfeebled, it doesn't contribute to GDP, but if you pay someone else to care for them, it does contribute. The same goes for childcare and mental illness. The act of caring for the permanently sick, however compassionate that may be, is a use of resources for no tangible gain. Therefore it does not contribute to GDP.

For these reasons, some people prefer to use other indicators to measure a country's standard of living. These 'social indicators' take non-economic factors into account, such as literacy rate, and life expectancy. Some examples are the Physical Quality of Life Index (PQLI), the Human Development Index (HDI), and the Basic Well-being Index (BWI).

1This is rather like saying that a household with an annual income of £30,000 per year shared between two people is better off than a household with annual income of £35,000 per year shared among five people.

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