FORUM 2

GDP is a good measurement yardstick to measure economic growth and standard of living in
a country. Agree or disagree. Explain why?

Gross Domestic Product (GDP) is an economic measure of a nation's total income

and output for a given time period (usually a year). GDP comprises consumer and government
purchases, domestic investments and net exports of goods and services. Because GDP takes
the whole of the economy into consideration and is used in the same manner around the
world, economists use it as a key measure of financial activity.

Although, GDP is used widely, frequently and consistently, there are limitations of
GDP per capita as a comparable measure of living standards. GDP is divided by the
population to estimate living standards of the citizens in a particular economy, However, the
welfare of the society could be an inaccurate reflection as GDP per capita is merely an
average. Economic inequality, the gap between the rich and the poor, consists of disparities
in the distribution of income within a population. As GDP per capita is a mena value, it does
not demonstrate income distribution.

Therefore, each citizen will receive different amounts of GDP depending on their
economic status and how much income they gain. If the GDP of a country increases, people
would naturally think that the standard of living has increased and people are spending more.
However, if there has been a natural disaster in a country, a lot of money would be spent on
the damages and infrastructure. This would ultimately lead to a rise in the GDP, but the
standard of living for the population would decrease from the damage of the disaster.
Additionally, a society with longer working hours will have a higher, but less leisure time
and not necessarily greater well-being.

GDP per capita does not take any of other factors that define standard of living into
consideration. This is a limitation as true representation of standard of living is not achieved
by only evaluation the GDP per capita of a country because there are many other components
incorporated in the definition. Problems that occur when measuring GDP in monetary terms
is that it doesn't show the purchasing power of money. Purchasing Power Parity (PPP)
estimates the amount of adjustment needed on the exchange rate between countries in order
for the exchange to be equivalent to each currency’s purchasing power. Currencies are
traded like any commodity and sometimes they are over or undervalued in different
countries. If the common exchange would be the result. Therefore, PPP is used to correct
the distortions caused by over or undervalued currencies.

Although, GDP per capita is a good measure of standard of living because it is

easy to compare and it is measured on a quarterly - basis and it is available for most countries
in the world. GDP does not measure the standard of living, but the total output of the national
economy. When measuring living standards, all social, cultural, environmental and political
factors should be included, which would produce an accurate representation of living
standards in a specific area.