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Economics Essays | Usefullness of GPD Per Head

Comment on the usefulness of GDP per head (measured at PPP) for
comparisons of living standards across countries and/over time

The article “ Chasing the leader” [1] illustrates the problem of using the GDP per Head measured at Purchasing Power Parity. The GDP per head measured at PPP, is not a very strong indicator of the living standards of the individuals in the respective countries. The data fail to indicate the discrepancies existing at the individual level. Here in the article, references have been made to primary sources for the reduced per capita GDP (measured at PPP) .The article how the living standard conditions are understated for the Europe and overstated for the USA. The article specifies the higher crime rates and the extreme climatic conditions existing in the USA as negative aspects of the living standards in the USA the per capita GDP of USA as compared to the Europe where the climatic conditions and crime rates are much lower does not indicate those. Again the continuous improvement of the productivity is not evident from the data. The article also talks about the state policy regarding the lack of public transport system that leads to higher GDP at a cost of public inconvenience .So the discrepancy is the living standards are not surely reflected by the GDP per capita measured in terms of the PPP.

The per capita GDP (measured at PPP) is an indicator of the average wealth of the individual of a particular country. It does not indicate the holding and consumption pattern within the economy. The discrepancy existing in the economy in terms of the consumption .The per capita GDP measure at PPP does not offer us indication on any of the specific parameters of the living standard of the countries. It gives us the direction of the wealthy ness of the individuals on an aggregate basis. Looking at per capita GDP for a country, we can not comment on the social and health conditions, social security conditions, percentage of the population below poverty line, the percentage of the population that have access to education (characterised by the literacy rate), the access to basic amenities like telephone, internet, road, hospitals etc. So, by using the data of GDP per capita measured at PPP, does not provide us any significant information. The PPP measurement, tries to balance out the difference in the price levels of the basket of goods to offer a standard basis to measure the conditions of different economies [2].

With the aid of appropriate data carry out a comparison of the living standards of two countries of your choice over the last decade. Your discussion should aim to cover all factors relevant to the comparison, including any that may not be fully captured by national income statistics.

Here we have selected USA and the Russian Federation to compare the living standards and how the GDP per capita measured at PPP has failed to indicate the differences in the living standards.

The parameters used for comparison are as follows:
# GDP per capita measured at PPP
# Human Development index
# Poverty conditions

# Wealth distribution and consumption within the economy
# Literacy
# Access to proper sanitation and drinking water
# Energy consumption
# Connectivity

Comparison of the US & Russian Federation
Here we are comparing the GDP (at Purchasing Power Parity) between the two countries the USA and the Russian Federation. [3]

Country	GDP Purchasing Power Parity ($ Bn)
United Sates	$9612.7
Russian Federation	$1219.4

The GDP (PPP) of the two countries apparently give the size of the economies .The data is inconclusive for making any comparisons between the living standards .The data do not give any indications for the living standards and conditions in the two countries.

We now look into data for per capita income (PPP), figures are created by dividing the GDP (PPP) with the population of the country, the figures are indicating the higher income for the US compared to the Russian Federation .The figures also do not indicating much about the living standards in the two countries. [4]

Country	GDP Per Capita $
United States	35935.2
Russian Federation	8759.9

We now look into the human development index; the USA is ranked 6th and the Russian Federation at 59th position out of 168 countries surveyed [5]. The first indicator for the living standards and is showing the huge disparity in the living conditions in the two countries.

The figure for the population living below the poverty line, we see around 13% of the US population is below the poverty line .For Russian Federation 40% of the population is below poverty line (1999). This figures are quite good indicators of the living standards in the two countries. 23% of the population in Russian Federation lives under 4$ a day. The poorest 20percent of the population has only 4.4 percent of the consumption. The Richest 20 percent of the population has 53.7 percent of the population, showing the huge discrepancy existing in the country and hence in living standards in the country. For US, the poorest 20 percent have around 5.3% of the consumption and the richest 20percent have around 46.4 percent of the consumption [6].


The consumption levels in the United States

The consumption levels at the Russian Federation.

Source World Development Indicators: World Bank. April 2003. Compiled by the author

The figures here indicate the basic levels of services enjoyed by the population in both the countries and we can see, the remarkable discrepancy existing in the levels of services .The difference in terms of GDP (PPP) has no direct influence on the living standards.

The life expectancy at the US is around 77 years; the life expectancy in the Russian Federation is only 65 years at birth, showing the difference in the living conditions of the two countries. The literacy rate again is quite similar in both countries, well over 99 percent. The access to quality sanitation and water are at 100 percent for both the countries [7].
Energy consumption per capita figures again showing the huge difference in terms of the living conditions not captured in the GDP per capita measured at PPP.
The Russian Federation

The United States

Source World Development Indicators: World Bank. April 2003. Compiled by the author.

So, from the above discussion, it is quite evident that how inadequate is the per capita GDP measured at PPP, to capture the true living conditions and standards within an economy. The true indicators should be able to interpret the parameters we have chosen here for measuring the living standards.

1. Chasing the Leader: The Economist: 8th Feb 2003. Page 86 [Return]
2. A review of PPP adjusted GDP Estimation. IMF 1995: Working Paper 95/18[Return]
3. World Development Indicators Database. April 2003 [Return]
4. World Development Indicators Database. April 2003[Return]
5. Nation Master website. Country profile US & Russian Federation[Return]
6. World Development Report 2003 [Return]
7. World Development Report 2003[Return]

• BIBLIOGRAPHY:
  
• Chasing the Leader: The Economist: 8th Feb 2003. Page 86
• A review of PPP adjusted GDP Estimation. IMF 1995: Working Paper 95/18
• World Development Indicators Database. April 2003 :World Bank Website
• Nation Master website. Country profile US & Russian Federation
• World Development Report 2003