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Limitations of using GDP to compare welfare

We also need to be careful when looking at growth and what it tells us about an economy. Simply because a country appears to be rich does not actually mean that it is, and this means that using national income figures like GDP as a measure of living standards may be inappropriate. An increase in real GDP denotes an increase in the output of goods and services of the economy, but does this lead to a corresponding increase in welfare?

When comparing economic growth or GDP figures between countries think about:

  • What the figure is and how we measure it, e.g. GDP per head per year
  • How the GDP is distributed
  • The type of economy under consideration, e.g. developed or developing
  • The costs of basic commodities in certain economies, e.g. housing in UK against an African country
  • How taxes are charged and who actually pays them
  • What level of social benefits are paid and to whom
  • Life expectancy, protein intake and years in education
  • Access to basic amenities, such as clean water
  • The proportion of goods and services that are not traded, e.g. home-grown food, bartered services. The presence of these can distort national income figures significantly as they will not appear.
  • The problem of comparing national incomes expressed in different currencies and the use of the exchange rate for this purpose.
  • The composition of the output, e.g. in terms of armaments and welfare services.
  • The extent to which additional output has generated negative externalities which may affect the quality of life.

All of the above will impact on how much of the nation's wealth you have access to and what use it is to you. Factors like these will mean that using just GDP figures as the basis for comparing living standards will be inappropriate and to compare living standards between countries we would also need to look at measures like:

  • Access to health care - a good measure of this is doctors or nurses per 1,000 people, though there are others.
  • Infant mortality - what proportion of children live beyond their fifth birthday?
  • Maternal mortality - how many mothers die in childbirth?
  • Life expectancy - how long are people expected to live and are there differences between the genders?
  • Access to safe water - is the water safe and how far do people have to travel to get to a safe water supply?
  • Agriculture as a percentage of GDP - many developing economies are heavily reliant on their primary sectors.
  • Child malnutrition - how much nutrition are children receiving in their diet - difficult to quantify, but a vital indicator of the standard of living.
  • Environmental measures - emissions, air quality, pollution indicators, cleanliness of water supply, quality of beaches and so on.
  • De-forestation rate - how rapidly is an economy using up its resources?
  • Expenditure on social security - social security is a vital safety net for the less well-off, but many developing economies have very poorly developed social security systems, if any.
  • Food aid - how much food aid and other overseas aid are they receiving?
  • Households with electricity - this is a useful measure of how well developed the infrastructure is.
  • Transport infrastructure - ditto.
  • Poverty line - how many people are living below the poverty line?
  • Access to education - one measure of this is teacher ratios (number of teachers per 1000 etc.), but we could also look at the proportion of the population enrolled at primary, secondary and tertiary levels of education.
  • Leisure - access to leisure services, Internet connectivity and so on.

The list above shows the range of other factors that influence one's standard and style of living. Some would add to this political factors such as:

  • Open government
  • Democracy
  • Accountable government
  • Civil rights
  • Rights of women and minority groups

N.B. We have to be careful not to confuse the cost of living with the standard of living. The cost of living depends on the rate of change of prices and the standard of living will partly depend on the latter in relation to income and also the various factors mentioned above.

As you can see, GDP alone is a fairly inadequate measure of welfare - other factors need to be considered.