What is GDP?

GDP 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. MEDCs (More Economically Developed Countries) have high GDPs and LEDCs (Less Economically Developed Countries) have low GDPs.

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 person – this is rather like saying that a household with annual income of £30, 000 per year shared amongst 2 people is better off than a household with annual income of £35, 000 per year shared amongst 5 people.

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:

However, it is not always the case that a country with a high GDP per capita is a country with high living standards because of the following reasons:

1. Different countries may have different sizes of informal/black economy (e.g. 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.

2. 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, whilst the majority of citizens live in relative poverty.

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

4. Some countries may grow rapidly by exploiting their non-renewable finite resources, e.g. oil and forests. Whilst 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.

5. GDP measures the total value of output produced but cannot distinguish between the effects of different output on different 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.

Alternatives to GDP

As a measure of living standards, some people prefer to use the PQLI (Physical Quality of Life Index). This is a numerical rating of a country’s living standards, taking into account 13 different indicators of living standards, including GDP, employment, education, health, and pollution levels.