3.1.4 Appropriateness of Using GDP/GNI to Measure Well-being

National income statistics are useful for making comparisons between countries
- They provide insights into the effectiveness of government policies
- They allow judgments to be made about the relative wealth and standard of living within each country
- They allow comparisons to be made over the same or different time periods
  - For example, the growth of the Asian Economies in the last 15 years can be compared to the growth of the European Economies in the 1990s
Using real GDP is a better comparison than nominal GDP
- One country may have a much higher rate of economic growth, but also a much higher rate of inflation. Real GDP provides a better comparison
Using real GDP/Capita provides better information than real GDP as it takes population differences into account
Using real GNI/capita is a more realistic metric for analysing the income available per person than GDP/capita
Using real GNP/capita provides information on the income that is actually within a country's borders
- This value can be significantly different from GDP/Capita

When studying national income data that has been provided for data response questions, you will often see a generalised pattern emerge

The reason for this is usually linked to multinational companies involved in resource extraction, who then send income/profits home

The Limitations of Using GDP data to Compare Living Standards Between Countries and over time

Limitation

Explanation

Lack of information provided
on inequality

The distribution of income in an economy is provided as an average (GDP/capita)
The differences in the standard of living within the same country can be significant

Quality of goods/services

GDP provides no information on the increase/decrease in the quality of goods/services over time
If quality worsens but prices are lower, then the standard of living is judged to have increased
The poor quality may actually have decreased the standard of living

Does not include unpaid/voluntary work

If it included voluntary/unpaid work, then GDP/capita would be higher
E.g. some economies have a high amount of family childcare provision. This increases standards of living but is not recorded in any way

Differences in hours worked

GDP data does not capture the amount of time taken to produce the GDP/capita
In one country, where it takes less time to generate income than in a similar country, the standard of living would actually be higher

Environmental factors

GDP does not capture the environmental and health impacts of generating income within a country (externalities)
In one country, where there are fewer externalities in generating income the standard of living would be higher

SL IB Economics

3.1.4 Appropriateness of Using GDP/GNI to Measure Well-being