Lesson preview · Measuring the economy
GDP and living standards
~8 min · Free to read
In 2023, India’s economy produced about 3.5 trillion US dollars of goods and services. The United Kingdom’s produced about 3.4 trillion. So India’s economy was bigger.
Were people in India better off than people in the UK? No. India had about 1.4 billion people, around 21 times the UK’s 68.5 million. Per person, the UK produced about 50,000 dollars and India about 2,400. Prices are lower in India, so a dollar goes further there. But even after adjusting for that, the UK produced about six times as much per person.
Key Term
GDP per person
GDP (gross domestic product) is the value of all the final goods and services produced inside a country in a year. (Final means not used up in making something else.) GDP per person, also called GDP per capita (Latin for “by heads”), is that total divided by the number of people.
It shows how much is produced for each person, on average, so you can compare countries of different sizes.
Divide a country’s total output by its number of people.
Producing things is how people earn, so more output per person usually means more income per person. That makes GDP per person a good first guide to living standards: how well off people are.
What makes GDP per person grow? Imagine a baker who makes 20 loaves an hour with an old oven. With a bigger, faster one, she makes 50. She works no longer, yet there’s more bread to go round. That is a rise in productivity: how much a worker produces in an hour. When each hour of work produces more, firms can pay more for it. Over many years, rising productivity is what lifts living standards most.
GDP mostly counts goods and services that are paid for and recorded. It misses a lot about how well people live:
- Unpaid work. Cooking, cleaning and caring for family at home aren’t counted. In 2018 the International Labour Organization estimated that unpaid care would be worth about 9% of world GDP if paid at the minimum wage.
- The informal economy. Work that isn’t registered with the government, such as street selling or cash-in-hand jobs. It’s hard to measure, so statistics offices can at best estimate it roughly. The International Labour Organization estimates that in 2024 nearly 6 in 10 of the world’s workers had informal jobs.
- Inequality. GDP per person is an average. It hides how income is shared.
- The environment. Cut down a forest and sell the timber, and GDP rises. The lost forest isn’t taken off.
- Health and free time. GDP doesn’t show how long people live or how many hours they work.
Key Term
The Human Development Index (HDI)
The United Nations’ HDI measures more than money. It combines income per person, life expectancy (how long a newborn can expect to live, on average) and years of schooling. Scores run from 0 to 1, and higher is better. It still leaves out inequality and the environment, which the UN measures separately.
Money and long lives don’t line up neatly. In 2022 the United States produced about three times as much per person as Costa Rica, even after adjusting for local prices. Yet Costa Ricans lived longer. Money helps: the poorest country here is last on both. But GDP per person alone can’t tell you how well people live.
Trap · Common Misconception
"GDP takes off the damage pollution does"
If a factory pollutes a river, nothing comes off GDP for the dirtier water. If the town then pays a firm to clean it up, the clean-up adds to GDP. GDP falls only when the pollution cuts other output, such as fish a fishing firm can no longer catch or work lost to illness. So a country can look richer on paper while its air and water get worse.
Check yourself · no marks
A village has 10 people. One earns 910,000 dollars a year, and the other nine earn 10,000 dollars each. What is income per person? Does it describe a typical villager?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 6
The Human Development Index (HDI) combines income per person with which two other measures?
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