Ways of comparing standard of living Flashcards
Nominal GDP definition
GDP figures that have not been adjusted for inflation
limitations of NOMINAL GDP 2 compare standard of living over time
Nominal increases doesnt mean standard of living has increased as cost of living may also have increased diluting some of the gains. If nominal incomes rise at sme rate as price levels real incomes stay the sme and if nominal incomes rise slower than price levels real income falls and vice versa if they rise quicker than price levels.
Real GDP definition
GDP figures that have been adjusted for inflation.
limitations of Real GDP 2 compare standard of living over time
Real GDP can even double but it has to take account the poulation as if it rises aswell the higher 100% GDP figure is spread over more people diluting the gains.
limitations of using total GDP figures 2 compare standard of living between countries
Not insightful as the value of goods produced by 2 countries can be the sme but 1 might have way more people than the other country so its not as accurate. GDP per capita is better.
limitations of using GDP per capita 2 compare standard of living between countries
One country may have a higher GDP than the other but doesnt mean their standard of living is that much higher as cost of living in other country could be lower so unless GDP figures have been adjusted for PPP it is not accurate.
Purchasing Power Parity (PPP) figures
Uses nominal GDP of a country and adjusts it to reflect its cost of living. Is the most useful piece of data as it takes into account population and cost of living.
PPP in countries with high Cost of living
less purchasing power
PPP in countries with low cost of living
high purchasing power
limitations of using GDP per capita at PPP 2 compare standard of living between countries (4 reasons)
1) Income could be made by selling goods and services in secret so data will underestimate output as it excludes black market g/s.
2) Doesnt show distribution of income. A country could have high GDP per capita at PPP but data could be “positively skewed” by a small number of elite individuals.
3) Doesnt show the sustainablility of economic activity. A country could have high GDP per capita at PPP but could be cutting down rainforests, hunting animals, overfishing etc causing living standards to fall.
4) Shows income and not wealth so 2 ppl may have sme GDP per capita at PPP but 1 is renting a million dollar house and another a 1 bedroom flat. Doesnt show enough info like the assets enjoyed.
Gross Domestic Product (GDP) definition
the value of all finished goods and services produced in a country over period of time.
