3.1 Living Standards and its Indicators - Material SOL Flashcards
1
Q
What indicates the material SOL of a country?
A
The material SOL can be indicated by the quantity of goods and services consumed by the average person in a country in a given time period. This is normally measured using the real GDP per capita of a country.
2
Q
Why is Real GDP per capita used as an indicator?
A
- real: eliminates the effects of inflation through holding prices at a constant/the base year levels
- GDP: shows the value of all final goods and services produced within the geographical boundary of a country during a given period of time
- per capita: gives an average value of goods and services produced for each resident
3
Q
Why is real GDP used over nominal GDP?
A
Changes in nominal GDP reflect changes in both the price and volume of output being produced, while real GDP eliminates the effect of inflation and reflects only changes in the volume of output.
4
Q
What are the limitations of using real GDP per capita? Explain these limitations.
A
- Income distribution: While the GDP measures the total value of goods and services produced in an economy, it conveys no information about who gets to enjoy these goods and services. Growth propagates the inequality in income distribution as the rapid growth in a certain industry will provide more opportunities for those in those industries (the higher the Gini Coefficient, greater the inequity of the distribution of goods and services).
- Composition of GDP: GDP measured by the expenditure method includes consumption, investment, government spending and net exports. Thus a change in GDP does not always link to an increase in consumption levels (increase in material SOL in the current period). Increases in investments may lead to long run increases in material SOL (more factories and plants to produce more in the future), while increases in government expenditure can have a range of effects on the material SOL of citizens, depending on what the government expenditure is linked to.
