Based on Week 1 (RWM 1.1) Robert F. Kennedy in 1968 said that GDP measures \"eve

Question

Based on Week 1 (RWM 1.1) Robert F. Kennedy in 1968 said that GDP measures "everything... except that which makes life worthwhile." Briefly explain in words, not an equation) what GDP per capita measures, and why economists often use GDP per capita as an approximation of standard of living. Applying the critical thinking used in "What does it Mean to be Better Off?" (RWM 1.1), what is something not measured in GDP that might "make life worthwhile"? What is something that is counted towards GDP that might make a country worse off? Explain your reasoning.

Explanation / Answer

GDP is the measure of total output of a country. What follows is that GDP per capita is the measure of per capita output or the output per person. In general, higher the per capita GDP, the higher is the standard of living.

The reason why economist use GDP per capita as a measure of standard of living is as follows - An increase in per capita GDP implies that more goods and services are available to consumers. It also implies that consumers are in a better position to buy more goods & services. This would indicate an increase in living standards.

One of the things that is not measured in GDP, but makes life worthwhile is happiness and satisfaction of individuals or households. A gradual increase in per capita GDP does not necessarily imply increase in happiness & satifsaction.

The point I am making is backed by the fact that the happiness index ranks countries like Finland, New Zealand, Sweden among others higher than the United States. But these countries have per capita GDP that's lower than the United States of America.

In my view, one of the components that might make a country worse off is the government spending factor. In general, the private sector is the dynamic sector of the economy and the government sector is the less dynamic sector. There are numerous examples of a country that has been ruined by excessive government sspending, higher government debt and hyperinflation.

While higher government spending might make the per capita GDP look relatively rosy, the long-term negative implications need to be clearly judged and factored.

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