Discuss the usefulness of real GDP per capita as a method of measuring
living standards of a country's population
In order to assess the usefulness of real GDP as a reflection of standard of living,
material welfare and wellbeing of individuals, in a country, one must first
understand what the term real GDP means. Real GDP is the value of nominal GDP
adjusted for price changes, inflation or deflation, hence creating an index for
quantity of total output of a country. However, some argue that real GDP is not an
accurate representation of a country's living standards for multiple reasons. I will be
looking at these various factors and assessing the extent to which real GDP per
capita is a useful for measuring living standards of a country's population.
It is useful to measure real GDP for various reasons. Essentially, GDP measures
the economic performance of a country. This provides an analysis of the economy's
growth rate and changes by determining the comparative strengths and
weaknesses of various sectors and therefore the different living standards within an
economy. This 'report card' helps policy-makers, central banks and investors easily
adjust and implement economic policy, cash circulation and investments
respectively because it shows said people what the living standards are and hence
how to improve them. Moreover, because GDP measures the national income and
national expenditure of a nation, due to ceteris paribus, it reflects on the wealth of
consumers as nations with greater levels of consumption and purchasing power
means the population has a greater disposable income on average and therefore a
better standard of living. As a result, because a nation's standard of living increases
as GDP increases, GDP serves as a simple proxy for social and economic welfare
of a nation.
The advantage of real GDP over nominal GDP is a simple one. The difference
between the two is that nominal GDP is a figure that expresses the gross domestic
output based on current prices whilst real GDP adjusts these values in accordance
with price changes over time, such as due to inflation or deflation. Using nominal
GDP may be misleading when comparing the change of living standards in a
country for, although the nominal GDP of Country X went from 300 Million USD to
600 Million USD over a 10 year period, the living standards did not double as prices
increased by 100% in this period, hence there was no increase in living standards
even if the nominal GDP would suggest this。Opposing this, real GDP takes into
consideration changes in market values when giving a GDP value therefore making
