I'm not an economist by profession and have bar some university modules never studied it to a major extent. But one thing about GDP per capita doesn't make sense to me.
GDP per capita is of course the economy (GDP) of a country divided by its population (or per head, or the Latin term, capita).
It's easy to calculate – if a country has a GDP of £2tn USD and it has 50m citizens, then it's basic arithmetic. But how does that relate to living standards? It seems to me GDP per capita is an off stat.
GDP is what is produced.
If living standards are the material level of wellbeing, in a loose sense, then what is produced is not directly connected to that. People can produce a lot and still be dirt poor. China has a big economy as does India, but the latter more so has amongst the worst poverty on Earth.
So what is produced, if shared amongst the population, cannot diretly correlate to how wealthy a person or population is. If anything it seems more connected to productivity. As GDP is inherently about the goods and services produced over a year, then if a country has a higher GDP per capita it means their workers are more productive.
Yes, productivity links to higher economic growth over time. But then even encomic growth per se doesn't correlate to higher living standards. A country's wealthy business class, who own plants, factories, land, etc., might get richer at the expense of others. Guyana now due to crude oil discoveries has a massively high GDP per capita, but is it really that wealthy overall? Probably not. Ireland's high GDP per capita is boosted by capital outflows and companies merely ship stuff out of Ireland. So this distorts its actual living standards, which whilst on paper look massively higher than the UK or Germany, in reality there isn't that much of a difference.
Is my hunch and view accurate or valid?
Isn't the UN Human Development Index a better measure of living standards? Or just median Household Income, since that directly relates to material wellbeing? The more one earns, then the more one can spend. Surely living standards if measured must account for consumption and not production, which GDP per capita relates to.
If using UN HDI, then Germany and Britain have a higher living standard than the US, whilst t if using GDP per capita, the US is contrary. That seems accurate. the USA persists in having the biggest economy largely due to its size and productivity. But in education, healthcare, etc. it scores pretty low on major global indices – low by advanced economy standards. The USA does have a high median household income, though it seems this is concentrated at the top levels, and the wealthiest of Americans are richer than the elites of other countries.
Why is GDP per capita used exactly to measure living standards?
byu/No-Veterinarian-3916 inAskEconomics
Posted by No-Veterinarian-3916
3 Comments
Chart: [Human Development Index vs. GDP per capita](https://ourworldindata.org/grapher/human-development-index-vs-gdp-per-capita)
They are correlated, but you are correct that they are different – as expected because they measure different things.
Collecting and compiling national level statistics is expensive. Poor countries struggle to fund much at all. GDP is designed to meet the needs of government treasury departments and central banks, so if a country produces one macroeconomic statistic, it’s probably GDP. Therefore if you want to do a cross-country comparison across a lot of countries, GDP per capita is most likely to be available.
The HDI uses GDP per capita, life expectancy and years of education. Life expectancy can be calculated as long as the country’s government provides birth and death certificates to a decent swathe of the population and years of education can generally be estimated from public schools records. So again, data availability is a key constraint.
Certainly though GDP per capita is at best a proxy for living standards and the World Bank, for its poverty statistics uses consumption surveys as much as possible.
Productivity is generally the most important factor in GDP per capita. Yes, more productive countries produce more.
GDP per capita is a measure of output. It’s what’s produced, but also *what’s consumed* (well it’s a bit more complex in detail with inventories and such, but that’s *basically* it).
People can only consume what they produce so GDP per capita might not be the *same* as standard of living, but it’s a huge determinant. You point at India and China, China has a much higher GDP per capita and almost no extreme poverty, while extreme poverty is still quite prevalent in India. In practice, GDP per capita and personal income aren’t perfectly correlated, but they are damn well correlated, as are GDP per capita and a whole bunch of other things we usually care about like education and healthcare.
https://ourworldindata.org/grapher/gdp-vs-happiness
https://ourworldindata.org/grapher/life-expectancy-vs-gdp-per-capita
https://ourworldindata.org/grapher/child-mortality-gdp-per-capita
https://ourworldindata.org/grapher/augmented-hdi-vs-gdp-per-capita
GDP per capita certainty isn’t perfect but it generally gives you a decent idea about a country’s performance.
>The USA does have a high median household income, though it seems this is concentrated at the top levels
I think you misunderstand the median here. It is not skewed by “high top levels”. That’s why you use the median.