GDP is often used as an indicator of the standard of living of the population. It is used by governments, economists and the media to examine how livings standard of the population change from one year to the next. However, there are a number of problems encountered when using GDP for this purpose. As a consequence we must be very careful when using GDP data as indicators of livings standards and poverty.
Increased GDP means more goods and services are being produced and consumed. Living standards must therefore be increasing. However caution must be taken when drawing this conclusion.
1. On a spreadsheet plot the GDP data from the resources section for Zambia from 1965 to 1998.
2. Has it increased over time?
3. How would you describe the changes that you see? (Refer to the data in detail)
Review the definitions of GDP and GNP in the glossary
1. What is the difference between these two terms?
2. For a country such as Zambia which would you think was a better measure of the output produced and income earned by Zambians? Justify your answer.
3. Under what circumstances might GDP be greater than GNP?
4. Using the data for GDP calculate the overall % change in the GDP between 1965 and 1998.
The increase that you have calculated might suggest that the standard of living of Zambians has increased. However, the population increase in Zambia means that the number of consumers and producers has also increased. Thus the increase in GDP may not mean that the amount of goods and services produced and consumed per person has changed. To find this we need to calculate the GDP per capita. Having done this you need to calculate the % change in the GDP per capita.
1. Complete the following table using the data in the resources section.
|GDP per capita|
The change in the GDP per capita is a better indicator of changes in living standards. However, there is an additional problem. Over the period between 1965 and 1998 the economy of Zambia has undergone considerable inflation. Thus the increase in the level of GDP may not be because there are any additional goods and services produced. It may be that the money value of the goods and services has increased simply due to the prices increasing. There is a need to calculate the actual increase in the amount of goods and services. This is done by measuring the increase in the level of GDP or GDP per capita at constant prices. This involves a mathematical calculation that attempts to value the GDP in different years at one year's set of prices. This means that subsequent comparisons of GDP data have taken into account inflation. Any change in GDP will then be a real change and represent more goods and services being produced. By doing this the real GDP or real GDP per capita is arrived at.
2. Review the theory section Measuring Poverty and give the formula for calculating the real GDP.
3. Complete the table using the data in the resources section. Describe the change in the level of real GDP per capita between 1965 and 1998.
|Real GDP per capita|
4. Which measure would you argue is a better indicator of living standards? What conclusions would you draw from the data you have calculated? Justify your conclusions by referring to the data.
1. Using a spreadsheet plot the real GDP from the data in the resources section for the following countries:
2. Over the period from 1960 to 1998 which countries have seen the greatest growth in their real GDP and which countries have seen the lowest growth in their real GDP per capita?
3. Identify four problems in using real GDP per capita to indicate the living standards of a country.