Saturday, 23 April 2011

Is GDP per capita the most appropriate measure of economic success?

GDP (Gross Domestic Product) is the sum of all the goods and services produced in an economy. GDP per capita is GDP/population. GDP per capita has been the accepted way of measuring economic success, but with the emergence of a number of other measures such as the HDI, the question is being raised: Is it the best measure of economic success?

GDP per capita is effective as it is a globally accepted measure that is relatively simple to measure and understand, it is a useful measure of wealth in an economy, and while higher average wages normally leads to higher levels of happiness and fewer problems such as lack of basic necessities, GDP per capita is not necessarily the best measure of economic success.

One problem with using GDP per capita to measure a country's economic well-being is that it is an average, and doesn't show income disparity. A more appropriate way of measuring equality is the Gini coefficient. For example, the USA has a high GDP per capita, $45,000, but its Gini coefficient is around .45 which means there is a very large amount of inequality.

The second flaw in the GDP per capita measure is that it doesn't take into account the informal economy. Because GDP is measured on tax revenue for the government, produce on which tax is not paid doesn't get factored in, but does still contribute to the wealth of the population. Mexico, for example, has a GDP per capita of only $8,000, but estimates of the informal economy suggest this figure could be around 50% larger.

Finally, GDP could be seen as a less credible measure of economic success as it does not measure the sustainability of the growth. It is a measure of economic activity, rather than a projection method, which means it could be due to unsustainable overuse of resources or poor allocation of investment.

While it is an easy and accurate economic measurement, GDP per capita is, in many cases, inappropriate for measuring economic success. Better methods would be a combinations of things such as the gini coefficient and the HDI as well as other measures of happiness among the population.


  1. Then what is the most appropriate method to measure the economic growth of a country