Explain how an increase in real GDP per capita can indicate an improvement in standard of living.

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Governments frequently strive to improve standard of living for their citizens. This is often done through policies designed to stimulate economic growth.

(a) Explain how an increase in real GDP per capita can indicate an improvement in standard of living. [10]

Introduction

Gross Domestic Product (GDP) is a measure of the total value of all goods and services produced within a country over a specific period. GDP per capita, which divides GDP by the total population, provides an average income measure for each person in a country. Real GDP per capita adjusts this figure for inflation, giving a more accurate reflection of the purchasing power of individuals over time.

The standard of living, on the other hand, is a broader concept that includes both material well-being, measured by access to goods and services, and non-material aspects such as health, education, and overall quality of life.

Increase in real GDP → improvement in SOL

An increase in real GDP per capita suggests that, on average, individuals in the economy are experiencing higher levels of income after accounting for inflation. With higher incomes, individuals can increase their consumption of goods and services, improving their material standard of living. This enhanced access to necessities and luxuries contributes to a higher standard of living in material terms.

Additionally, when real GDP per capita increases, the government typically collects more tax revenue through both direct and indirect taxes. With increased fiscal resources, the government can invest more in public and merit goods such as healthcare, education, and infrastructure. These investments not only improve the material standard of living but also enhance the non-material aspects by improving the quality of public services. For example, better healthcare reduces mortality rates, while improved public transportation infrastructure can decrease travel times, giving people more leisure time and improving work-life balance.

Since real GDP per capita accounts for both inflation and population growth, an increase in this measure indicates that the economy is growing in real terms, and individuals are better off despite potential changes in population size. This makes it a robust indicator of improvements in material well-being, as it reflects higher average income levels after accounting for the erosion of purchasing power due to inflation.

Limitations of Using Real GDP per Capita

While an increase in real GDP per capita may suggest improvements in the standard of living, it is important to recognise its limitations. One significant limitation is that real GDP per capita does not capture income distribution within a country. If income inequality is high, the benefits of economic growth may not be evenly shared. In such cases, the increase in real GDP per capita may overstate improvements in living standards for the average person. For instance, if most of the gains in GDP are concentrated among the wealthiest households, the median income — which better reflects the income of the typical person — may remain stagnant, and many individuals may not experience any significant improvement in their standard of living.

Furthermore, real GDP per capita focuses primarily on material aspects of well-being and may not fully capture changes in non-material factors that affect the standard of living. For example, increases in real GDP per capita might coincide with environmental degradation, rising stress levels, or deteriorating work-life balance, all of which could reduce the quality of life despite higher income levels. As such, real GDP per capita should be supplemented by other indicators, such as measures of health, education, and income inequality, to obtain a more comprehensive view of improvements in standard of living.

Conclusion

In summary, an increase in real GDP per capita can indicate an improvement in the standard of living by suggesting that individuals have higher disposable incomes, enabling them to purchase more goods and services. It also suggests that the government can enhance public services, improving both material and non-material well-being. These are however not always certain since, real GDP per capita has limitations, particularly in its failure to account for income inequality and non-material aspects of quality of life. Therefore, while it is a useful indicator, it should be used alongside other measures to assess overall improvements in standard of living more accurately.