Gdp, Is It a Useful Measure of Living Standards?

1347 WordsFeb 27, 20136 Pages
Why is GDP per capita useful as a measure of living standards? What are the limitations of GDP per capita as a comparable measure of living standards? Gross Domestic Product (GDP) measures the monetary value of final goods and services produced in a given year by factors of production within a country. GDP reports are released on the last day of each quarter, reflecting the previous quarter. Therefore, it is measured on a quarterly basis and measures the level of economic growth in different countries. GDP is commonly expressed as an international currency and is useful because it is widely known, easily calculated and provides a useful statistic for comparison. These figures can help us determine whether a nation’s economy has…show more content…
Currencies are traded like any commodity and sometimes they are over or undervalued in different countries. If the common exchange rate was used, a distorted picture of comparable living standards would be the result. Therefore, PPP is used to correct the distortions caused by over or undervalued currencies. GDP per capita ignores the value of goods and services that are not traded, which may understate the true living standards because of the black economy. In a black/hidden economy, economic activity and the consumption of goods and services are not recorded or included in the GDP. The illegal economy is part of the hidden economy and consists of income produced by violating legal laws, such as criminal activities, drug trafficking and prostitution. Therefore these activities do not show up on tax authorities. Non-market goods and services are not recorded either. An example of this is babysitting; some parents may put their children in daycare centres, which they pay and therefore the money is included in the economic activity of the country. On the other hand, a parent may ask a neighbor to look after their child whilst they go out, as a favour without paying them. The neighbor is executing the exact same service that a daycare centre would, except they do not receive any money for doing so. The Economist's latest estimates for the total value of the black economy throughout the world is $9 trillion and
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