They say what matters most in life are the things money can’t buy. So far, we’ve been paying attention to a figure that’s intimately linked to the things money can

They say what matters most in life are the things money can’t buy.

So far, we’ve been paying attention to a figure that’s intimately linked to the things money can buy. That figure is GDP, both nominal, and real. But before you write off GDP as strictly a measure of wealth, here’s something to think about.

Increases in real GDP per capita also correlate to improvements in those things money can’t buy.

Health. Happiness. Education.

What this means is, as real GDP per capita rises, a country may also see related benefits.

As the figure increases, people’s longevity tends to march upward along with it. Citizens tend to be better educated. Over time, growth in real GDP per capita also correlates to an increase in income for the country’s poorest citizens.

But before you think of GDP per capita as a panacea for measuring human progress, here’s a caveat.

GDP per capita, while useful, is not a perfect measure.

For example: GDP per capita is roughly the same in Nigeria, Pakistan, and Honduras. As such, you might think the three countries have about the same standard of living.

But, a much larger portion of Nigeria's population lives on less than $2/day than the other two countries.

This isn’t a question of income, but of income distribution—a matter GDP per capita can’t fully address. In a way, real GDP per capita is like a thermometer reading—it gives a quick look at temperature, but it doesn’t tell us everything.

It’s far from the end-all, be-all of measuring our state of well-being. Still, it’s worth understanding how GDP per capita correlates to many of the other things we care about: our health, our happiness, and our education.

So join us in this video, as we work to understand how GDP per capita helps us measure a country’s standard of living. As we said: it's not a perfect measure, but it is a useful one.

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Is Real GDP per capita a good measure of the standard of living? People tell me all the time, "You economists, you're too materialistic." Doesn't Real GDP per capita just measure the things we buy? What about our health, our happiness, education? Well, Real GDP per capita -- it's not a perfect measure. But I want to show you why it's probably the best single measure of the average standard of living in a country. And that's not because material goods are the most important goods. It's because Real GDP per capita is correlated with many of the other things that we care about.


Let's start with life expectancy. Here we show Real GDP per capita along the horizontal axis and life expectancy along the vertical axis. As you can see, there's a positive correlation. Countries that have a higher GDP per capita also have a higher life expectancy. Perhaps that's not too surprising. Let's take a look at happiness. Maybe this is a more surprising fact. This chart shows GDP per capita on the horizontal axis and now a measure of happiness on the vertical axis. Again, we see a positive correlation. Countries with a higher Real GDP per capita also tend to have happier people, on average.


Here's a data set from the United Nations. It's called the Human Development Index. It combines measures of life expectancy, education, and standard of living. Overall you can see, in general, as GDP per capita increases, so does human development -- at least as measured by this index. The basic story -- it's pretty simple. When we have more goods and services, we can usually afford more of the other good things in life. So, the good things in life -- they tend to go together. However, GDP per capita is far from perfect.


Here's one problem. GDP per capita misses the distribution of income. For example, let's compare the Real GDP per capita of Nigeria, Pakistan, and Honduras. It's actually pretty similar. So, you might think that all three countries have similar living standards. And yet, in Nigeria, about 80% of the population lives on less than $2 a day. In Pakistan, it's only 60%. In Honduras, it's only 33%. How can the number of people living in abject poverty be so different, when Real GDP per capita is about the same? The reason is that income in Nigeria is much more unequally distributed than in Pakistan or Honduras. Nigeria has many poor people, but also some very rich people. So average income -- it's about the same in Nigeria, Pakistan, or Honduras, even though there are more poor people in Nigeria.


Over time, however, growth in Real GDP per capita, whether in Nigeria, Pakistan, or Honduras, usually does indicate growth in everyone's incomes, including the incomes of the very poor. So, this graph shows growth in per capita incomes along the horizontal axis, with growth in the incomes of the poorest 20% on the vertical axis. Once again you see, as average per capita income increases, you also see increases in income of the very poor. Overall, Real GDP and Real GDP per capita have proven to be useful measures for comparing the standard of living of two different countries, or for comparing the same country at different points in time.

 

Okay. So now that you know that Real GDP per capita -- it's a good measure of the standard of living, we get to the really crucial question. How do we increase the standard of living? How do we grow an economy? How do we increase Real GDP per capita? That is a big question, the big question of development. We'll be tackling it in a number of future videos. But before you go, take a moment to let us know how we're doing. What do you think of the videos? How can we improve? Drop us an email or leave us some feedback on our website. Thanks.

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user's picture

If 100 items of a product are produced in one year and only 80 are sold,
the remaining 20 are still included in GDP for the same year. They are NOT
carried over to the GDP of ensuing year.

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In the first video they said only finished sold goods count to GDP.

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