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GDP as a measure of national well being or of the standard of living of the people in a country GDP is a measure of national output, not of national well being. However it is frequently used as such a measure so we need to know its strengths and weaknesses when it is so used. First it should be noted that Real GDP per capita is what is compared because it is Real GDP per capita that gives a snapshot of the actual output (real) of goods and services available for the people (per capita) to share. In other words, how big of a piece of pie is available to each person in a country. A. Strengths 1) It is readily available for every country. 2) It is highly correlated with many measures of well being b) Longevity-life expectancy c) Infant Mortality d) Access to Medical Care e) Literacy f) Educational attainment g) Shelter-sq.ft. per person h) # of cars per 1000 people i) # of cell phones per 1000 people j) A. Weaknesses 1- Ignores non-market production (within households) a) Work of housewives 2- 34- # of homes with running water k) # of homes with sewer connections l) # of TVs per 1000 5- m) # of personal computers per 1000 6- n) Etcetera etcetra 7- b- doing your own repairs c- growing your own food Ignores non-market transactions (between households) a-working on open source software b- doing volunteer work Ignores non-monetary transactions— barter arrangements Ignores underground production a- Production and sale of illegal goods and services b- Unreported income from production to avoid taxes Quality improvements and inventions a- for example cell phones, the Internet, flat screen TVs, automobiles Ignores bads (negative externalities- e.g., pollution) Ignores leisure time B. Strengths B-Weaknesses 1) Same as above 1- Same as above 2) Better if Purchasing Power Parity is used to 2- Using widely fluxuating exchange rates can translate one country’s monetary units throw off comparisons radically into another country’s http://en.wikipedia.org/wiki/GDP#Standard_of_living_and_GDP http://en.wikipedia.org/wiki/GDP#Limitations_of_GDP_to_judge_the_health_of_an_economy http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita -- exchange rate based C. Strengths 1) Same as in A. 2) As long as we are comparing inflation adjusted (real) GDP per capita C-Weaknesses 1- Same as in A, especially A.1, 2, 5, and 7 2- Inflation can badly bias the comparisons 3- Difficult to construct a Price Index over long periods of time