Appropriateness of Using GDP/GNI to Measure Well-being (DP IB Economics)

Revision Note

Written by: Steve Vorster, Economics & Business Subject Lead

Reviewed by: Jenna Quinn, Head of New Subjects

National income statistics are useful for making comparisons between countries
- They provide insights into the effectiveness of government policies
- They allow judgments to be made about the relative wealth and standard of living within each country
- They allow comparisons to be made over the same or different time periods
  - For example, the growth of the Asian Economies in the last 15 years can be compared to the growth of the European Economies in the 1990s
Using real GDP is a better comparison than nominal GDP
- One country may have a much higher rate of economic growth, but also a much higher rate of inflation. Real GDP provides a better comparison
Using real GDP/Capita provides better information than real GDP as it takes population differences into account
Using real GNI/capita is a more realistic metric for analysing the income available per person than GDP/capita
Using real GNP/capita provides information on the income that is actually within a country's borders
- This value can be significantly different from GDP/Capita

When studying national income data that has been provided for data response questions, you will often see a generalised pattern emerge

The reason for this is usually linked to multinational companies involved in resource extraction, who then send income/profits home

The Limitations of Using GDP data to Compare Living Standards Between Countries and over time

Limitation	Explanation
Lack of information provided on inequality	The distribution of income in an economy is provided as an average (GDP/capita) The differences in the standard of living within the same country can be significant
Quality of goods/services	GDP provides no information on the increase/decrease in the quality of goods/services over time If quality worsens but prices are lower, then the standard of living is judged to have increased The poor quality may actually have decreased the standard of living
Does not include unpaid/voluntary work	If it included voluntary/unpaid work, then GDP/capita would be higher E.g. some economies have a high amount of family childcare provision. This increases standards of living but is not recorded in any way
Differences in hours worked	GDP data does not capture the amount of time taken to produce the GDP/capita In one country, where it takes less time to generate income than in a similar country, the standard of living would actually be higher
Environmental factors	GDP does not capture the environmental and health impacts of generating income within a country (externalities) In one country, where there are fewer externalities in generating income the standard of living would be higher

Last updated: 19 March 2024

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