There are various limitations of using GDP
per Capita as a comparable measure of living standards. As
mentioned earlier, the GDP per capita measure is the nominal GDP divided by the
population. Thus, for a give amount of output, a country with a smaller
population will have a higher standard of living than a country with a larger
population. This is a problem often faced in countries with very low GDP per Capita
measures of the standard of living. When GDP grows slowly and the population
increases rapidly, the GDP per capita and thus the standard of living tends to
decline over time. Thus, this is major limitation of using GDP per Capita as a
measure of living standards as it will not accurately show the increase, unless
the population growth rate is controlled at the same time too.
Moreover, GDP per Capita does not taken into
account the hidden economy. The hidden economy is estimated to be worth $9
trillion throughout the world, it is estimated to be an average of 15% national
output for rich economies and 33% of national output for emerging economies.
Nigeria and Thailand are estimated to have largest hidden economy, accounting
for more than 70% of official GDP. The hidden economy consists of the black
market, the grey market economy and the shadow economy. The black market refers
to illegal trade of products such as drugs. Although, the grey market economy
is legal activity, for example if your friend gives you a product and you sell
it on for a profit. Similarly, the shadow economy is legal activity however; it
is not declared, such as baby-sitting for your neighbours. As a result of the
hidden economy creates a limitation for GDP per Capita as a comparable measure
of living standards, as the GDP per Capita is not able to take into account he
hidden economy activity.
Additionally, increased living standards
also includes increased leisure, although this does not result in increased GDP
per Capita, in fact it lower it, therefore it is a limitation of GDP per Capita
as a comparable measure of living standards. Similarly, GDP per Capita does not
measure improvements in product quality unless they are included in the price,
hence making improvements in product quality another limitation.
Furthermore, GDP per Capita makes no values
adjustments for changes in composition of output.
If an economy devotes too many resources to satisfying the short run needs and
wants of consumers or more demerit goods such as guns, than merit goods such as
education, standards of living would decrease. This is because there may be
insufficient resources for investment needed for long-term economic development
and therefore standards of living would be decreasing in the long run even
though the GDP per Capita will show it as increasing, thus this would be a
limitation as it would not show a comparable measure of living standards.
Moreover, another
limitation of using GDP per Capita as a comparable measure of living standards
is that is cannot take into account noneconomic sources of well-being that increase
standards of living. These include but are not limited to; courtesy, crime
reduction, etc. It also neglects the environment, for example it does not
deducted from the GDP per Capita (oil spills, increased incidence of cancer,
destruction of habitat for wild life, the loss of a clear obstructed view).
Neither does GDP per Capita include payments made for cleaning up oil spills
and the cost of health care for cancer victims. Also, it does not take into
account that resource depletion could result in lower future output and hence
decrease standard of living, therefore GDP per Capita is a limitation as a
comparable measure of living standards.
In conclusion, I
believe there are many limitations of using GDP per Capita as a comparable
measure of living standards, the main limitation being that it is not an
accurate reflection of living standards as it does not take into account many
aspects of material welfare.
