How does gross domestic product (GDP) affect standard of living?

A:

Gross domestic product (GDP) measures the total output of an entire economy by adding up total consumption, investment, government expenditure and net exports. GDP is therefore considered a quality approximation of income for an entire economy in a given period.

Per capita GDP is calculated by dividing total GDP by a country’s population, and this figure is frequently cited when assessing standard of living. There are a number of adjustments to GDP used by economists to improve the explanatory power of the statistic, and economists have also developed a number of alternative metrics to measure standard of living.

Application and Shortcomings

While standard of living is a complex topic with no universally objective measurement, rising global income since the Industrial Revolution has undeniably been accompanied by global poverty reduction, improved life expectancy, increased investment in technology development and a high material standard of living in general.

GDP is divided by population to determine personal income, adjusted for inflation with real GDP and adjusted for purchasing power parity to control for the impacts of regional price disparities. Real per capita GDP adjusted for purchasing power parity is a heavily refined statistic used to measure true income, which is an important element of well-being.

Many economists and academics have observed that income is not the only determinant of well-being, so other metrics have been proposed to measure standard of living. The Human Development Index (HDI) was developed by economists in association with the United Nations Development Programme, and this metric includes measurements of life expectancy and education in addition to per capita income. Prior to 2010, GDP was a direct input in the official calculation of HDI, but it has since changed to gross national product (GNP). There are also adjustments to HDI that account for such variables as income inequality.

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