Pros and cons of the GDP per capita

Written by jason powers
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Pros and cons of the GDP per capita
Economic activity is what is used to calculate the GDP per capita. (Jupiterimages/Brand X Pictures/Getty Images)

The GDP, or gross domestic product, is a number measuring the total value of all goods and services produced in a country in a given year. To determine the GDP, economists take the total consumer, government and investment spending, plus the value of exports, and subtract the value of imports. This number divided by the number of people in the country is the GDP per capita, or per person. Economic health in a capitalist society is currently assessed in terms of constant economic growth, primarily indicated by rises and drops in the GDP and GDP per capita.

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What GDP per Capita Does Tell

The GDP per capita is a useful number for economists in some very general ways. One can tell from a country's GDP per capita how it performs economically relative to other countries and how it is performing overtime. It is also a fairly decent indicator of average standard of living in a country. A rise in th GDP per capita generally means economic growth and a rise in standard of living for many of the people in the country.

Limitations As a Measurement of Economic Health

Despite its usefulness in some general areas critics cite many limitations. Since the calculation is an average of all economic activity based on the number of people in an entire country, it says nothing about regional economic differences within a country, nor does it give any indication of income disparity in the country. Additionally, GDP per capita doesn't include those outside economic system like the homeless or illegal immigrants. Any under-the-table, trade or black market exchange of goods and services, a sizeable part of the economic activity in many countries, is similarly unaccounted for. These exclusions, say critics, give a skewed economic picture.

Limitations As a Measurement of Human Well-Being

Although GDP per capita is generally seen as an indicator of standard of living, it also falls short in this respect. The consequences of economic activity: social costs, environmental destruction, pollution and resources used up in the production process are not included in the calculations. Because of this, critics indicate that it gives, at best, a cursory and oversimplified measurement of human well-being. At worst it presents an entirely unrelated picture since conditions generating human happiness are more complicated than mere economic activity.

More Accurate Measurements of the Economy and Human Well-Being

Although many economists agree that GDP per capita gives a more accurate picture than GDP of economic health and human happiness in a country, they both fall short. Intellectuals and economists have debated the issue and have yet to find a good alternative. Some proposed alternatives include including social and environmental consequences of economic activity in a "green accounting" process. Others incorporate the economic value of leisure activity and look at whether economic growth has led to more well-being. None of these alternatives has replaced the primacy of the GDP and GDP per capita, however.

Bhutan's GNH

Based on the premise that the fundamental purpose of economy and politics is human well-being, a novel solution enacted by the country of Bhutan is to have a gross national happiness measurement (GNH) instead of a GDP. This GNH is calculated based on economic self-reliance, environmental purity, preservation of Bhutanese culture and democratic governance. Measures similar to this have been explored in other countries, like the United States, but Bhutan is still the only one actually to have enacted such a policy in an official capacity.

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