Evaluating GDP as a Measure of Standard of Living: An Analysis

This homework assignment delves into the use of Gross Domestic Product (GDP) as a tool for comparing standards of living across different time periods and between countries. It clarifies the distinction between real and nominal GDP, emphasizing the importance of adjusting for inflation to accurately reflect changes in living standards. The assignment then explores the limitations of GDP per capita as a sole indicator of well-being, acknowledging factors like inequality and environmental impact. Using data from the USA and India, the assignment estimates the time it would take for each country's standard of living to double, based on historical GDP growth rates, and evaluates the convergence or divergence in living standards between these two nations. The analysis highlights economic trends and the evolving relationship between these two countries.

Q 1. How can we use Gross Domestic Product (GDP) to compare the standard of living over time and between
countries?
Answer. GDP is defined as “the money value of all final goods and services produced within a country in a
particular period”. It can be used to compare the standard of living across time and between countries, but it is
a bit tricky because people consume a different mix of products and services at various times. Usually, the
average standard of living is estimated by dividing GDP by total population, which is called GDP per capita.
This ascertains the level of living. In order to make comparisons between the GDP of countries, it is calculated
in dollars so that a standard measure can be used for comparison. While comparing GDP across time, the
general change in prices or the inflation is adjusted. This is done because prices of goods change from time to
time, and they should be considered while calculating the GDP. If a country says that its GDP increased from
$100 to $200, it is talking about nominal GDP which is not a correct measure of standard of living but if it is
saying that inflation increased from $10 to $20 and our GDP still increased from $100 to $200, then it is real
GDP and a correct measure of standard of living. Real GDP is calculated as nominal GDP divided by GDP
deflator. So it can be said that nominal GDP has two parts- real GDP which when increases, raises the standard
of living and inflation which when increases, does not increase the standard of living (Kitov, n.d.). So the
standard of living can be compared between two countries by dividing real GDP by the population and then
observing which country has a higher standard of living despite the adjustments made due to price fluctuations
over time.
Q 2. Discuss whether GDP per capita is a good measure of the standard of living?
Answer. GDP is defined as “the money value of all final goods and services produced within a country in a
particular period”. GDP per capita is GDP divided by population and it is a popular indicator to measure the
standard of living. There are three methods to estimate GDP. One way is to add the value of the output of all
producers and then record the total output. Another way is to sum up the expenditures on output made by
houses, firms, public sector and people from abroad (minus the residents buying from a foreign country). A
third way to calculate GDP is to add income of all producers, the wages, profits, rents and taxes of an
economy are the flipside of the value added in a given time period.
But when we talk about GDP per capita, it is not a flawless measure because it fails to capture the inequality
and does not give a transparent picture of poverty. Also, it does not assess the impact of economic activity on
the environment. The value of leisure and longevity is not considered when the standard of living is measured

using GDP per capita. It certainly does not serve as a perfect indicator of the quality of life of people. For e.g.
traffic jams increases in a country, hence, the use of gasoline also increases. This may increase the GDP of the
country, but the quality of life is certainly decreasing.
Real GDP per capita is better than nominal GDP per capita because, in nominal, the inflation is not taken into
account. But GDP per capita cannot be considered as a perfect measure of standard of living because many
aspects are not taken into account while calculating it.
Q 3. Using data for a developed and developing country of your choice, estimate how long it would take for
the standard of living to double in each country.
Answer. The table depicts the growth rate of GDP of USA (developed country) and India (developing country)
from the previous year from 2010-2015. GDP shows the standard of living of a country. We will use the
moving average method to see that when the GDP will double in each country.
GDP of the USA from 2010-2015 GDP of India from 2010-2015

USA: using data from 2013-2015, the growth rate of GDP in 2016 will be 2.16% ((1.49+2.43+2.57)/3), in
2017 it will be 2.8, in 2018 it will be 2.68 and so on. It will get doubled i.e. from 2.57 in 2015 it will reach to
5.14 in approximately 20 years (Khodabakhshi, n.d.)
India: using data from 2013-2015, the growth rate of GDP in 2016 will be 7.46% ((6.9+7.29+7.26)/3), in 2017
it will be 7.54, in 2018, it will be 7.65 and so on. It will get doubled i.e. from 7.26 in 2015 it will reach to 14.52
in approximately 25 years.
There are other factors too that are considered while comparing the standard of living of two countries like the
USA has an average per capita income of $38,000 approximately and India has an average of per capita
income between $1,000 to $12,000 which is very less as for a nation to be considered as developed, a
minimum of $12,000 income per capita is required ("World Bank Research Observer Cumulative Index, 1994-
1999", 2000)
Q 4. Evaluate whether there has been convergence or divergence in the standard of living between the
countries.
Answer. Convergence and divergence are trends in the economic development of countries. It helps to observe
the per capita differences and income growth rates among countries. There has been a convergence between
India and USA because of rapid economic growth in Asia which has resulted in growth in India too, but the
difference between average per capita incomes between the two countries has not reduced much because
income inequality prevails in India. The rich are growing and becoming richer but the poor class is not getting
developed at a fast pace, and their standard of living is not improving much. Convergence has led to the
development of developing countries at a greater pace than developed countries, and they have taken full
advantage of this opportunity. Long-term growth prospects of India are also improving. India needs the USA to
protect its multiple regional and global interests (Pichurin, 2012). The USA has played a role of chief defender
of global commons and India needs to do the same, especially in the Indo-Pacific region. The partnership
between the two countries has led to regional peace and prosperity. The interests of two countries have been
stronger especially in two regions- Southwest Asia and East Asia. So we can say that there has been a
convergence between India and USA for some years.

References:
Khodabakhshi, A. Relationship between GDP and Human Development Indices in India. SSRN Electronic
Journal. http://dx.doi.org/10.2139/ssrn.1867887
Kitov, I. GDP Growth Rate and Population. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.886660
Pichurin, I. (2012). Analysis of per capita income dynamics of the USA and Russia gross domestic product.
Eor, 108-115. http://dx.doi.org/10.17059/2012-3-10
World Bank Research Observer Cumulative Index, 1994-1999. (2000). The World Bank Research Observer,
15(1), 137-144. http://dx.doi.org/10.1093/wbro/15.1.137