GDP and standard of living

Economists use a single number to compare the size of national economies — gross domestic product, or GDP. GDP is one of the most-quoted figures in the news, but it is also one of the most misunderstood. To use it well, you have to know exactly what it measures and what it leaves out.

What GDP Is

Gross domestic product is the total value of all goods and services produced inside a country in one year. Every loaf of bread baked, every haircut given, every bridge built, every software license sold — all of it is added together and reported in a single currency, usually US dollars. A larger GDP means the country produced more economic value during the year.

GDP Per Capita

GDP alone can be misleading. A huge country with a large population will naturally have a bigger GDP than a small country, even if the average person there is poorer. To fix this, economists divide GDP by population to get GDP per capita — the average value of production per person. Per capita figures are far better for comparing how rich the average person is in different countries.

GDP vs GNP

Gross national product (GNP) is a related measure. GDP counts production inside the country, no matter who owns the factory. GNP counts production by citizens of the country, no matter where in the world that production happens. For most countries the two figures are close, but for places with many citizens working abroad — or many foreign companies operating locally — they can differ.

What GDP Does Not Measure

• Inequality — a country can have high GDP while most wealth is concentrated in a few hands.
• Happiness and well-being — money buys goods, but it is not the same as a good life.
• Unpaid work — caring for family members, volunteer work, and housework are not counted.
• Environmental damage — cutting down a forest to sell timber adds to GDP even though it harms nature.
• Sustainability — GDP says nothing about whether today's production can continue in the future.

Standard of Living

Standard of living is a broader idea than GDP. It includes income, but also health, education, safety, housing quality, working conditions, and leisure time. A country with a high standard of living usually has a high GDP per capita, but the link is not perfect. Some countries with moderate GDP still provide an excellent standard of living through good public services and shared resources.