4.6: Per capita real GDP

Real GDP is a simple measure of the total real income and output of an economy. The percentage change in real GDP we saw in Figures 4.1, 4.2 and 4.3 shows how fast the economy is growing. But we are also interested in what is happening to productivity, the standard of living in the economy and how they change over time. For a given real GDP, the larger the population, the lower is productivity and the smaller is the quantity of goods and services per person. To get a simple measure of the standard of living enjoyed by a person in the economy it is better to look at per capita real GDP, which adjusts for population. Whether or not growth in total GDP improves standards of living depends also on what is happening to the size of the population. To find per capita real GDP for a country, which is real GDP per person, we simply divide real GDP by population.

Per capita real GDP: real GDP per person.

(4.10)

The study of short-run macroeconomics is strongly motivated by the negative effects of recessions on national standards of living. Figure 4.6 shows the negative effects of recessions on per capita GDP in 1982, 1991, and 2009.

Figure 4.6 Quarterly Rates of Growth in Per Capita Real GDP in Canada, 1982–2016

Source: Statistics Canada, CANSIM Table 380-0064 and Series V1

Macroeconomic models are built to help us understand the causes of fluctuations in real GDP, employment, and the price level. Understanding the workings of the economy is essential for the design and implementation of monetary and fiscal policies that contribute to economic stability and protect standards of living.

In longer time horizons macroeconomics seeks to understand and explain the growth of real GDP that is essential to protect and improve standards of living as population grows. Growth also increases the capacity of the economy to direct its resources to a wider range of activities that may include improvements in the quality of goods and services produced or reductions in the effects of growth on social and environmental conditions.

Limitations of real GDP

Because we use GDP to measure the output and income of an economy, the coverage should be as comprehensive as possible. We should also recognize that the composition of GDP and the distribution of income are important to a country's standard of living.

In practice, we encounter several problems when including all production in GDP. First, some production causes noise, pollution, and congestion, which do not contribute to economic welfare. Current national and international concern about greenhouse gases and climate change is a clear and obvious example of the issues involved. We should adjust GDP for these costs to evaluate standards of living more accurately. This is sensible but difficult to do. Recent policy changes by governments to impose carbon taxes on fuels and fuel efficiency targets for automobiles aim to reduce some greenhouse gases. But most such nuisance goods are not traded through markets, so it is hard to quantify their output or decide how to value their costs to society.

Similarly, many valuable goods and services are excluded from GDP because they are not marketed and therefore are hard to measure. These include the home cleaning, maintenance, and improvements households carry out for themselves, and any unreported jobs and incomes in the economy. Deducting nuisance outputs and adding the value of unreported and non-marketed incomes would make GDP a more accurate measure of the economy's production of goods and services.

Furthermore, high GDP and even high per capita GDP are not necessarily good measures of economic well-being. The composition of that output also affects standards of living. Health care services are likely to have different effects than military expenditures. The United Nations prepares an annual Human Development Index (HDI) to provide a more comprehensive measure of a country's achievements. The HDI provides a summary measure based on life expectancy, adult literacy, and real GDP per capita.

Table 4.6 shows HDIs for the top ten countries in 2015, according to the Human Development Report, 2016. The second last and last columns in the table are of particular interest. The second last column shows the HDI adjusted for national per capita GNP. The underlying argument is that ranking national economic wellbeing simply by using per capita GNP would miss the importance of life expectancy and education as indicators of standards of living. For example, Singapore and the United States would rank highest by per capita GNP alone, but that ranking is reduced by lower life expectancy and years of schooling. The last two columns in the table compare HDI rankings in 2015 compared to 2014.

Table 4.6 Top ten countries based on the United Nations human development index

HDI	Country	HDI	Life	Expected	Mean	GNP/pop1	GNP/pop	HDI
Rank			Expectancy	yrs	yrs		– HDI	rank
			(years)	schooling	schooling		rank2
		2015	2015	2015	2015	2015	2015	2014
1	Norway	0.949	81.7	17.7	12.7	67614	5	1
2	Australia	0.939	82.5	20.4	13.2	42822	19	3
2	Switzerland	0.939	83.1	16	13.4	56364	7	2
4	Germany	0.926	81.1	17.1	13.2	45000	13	4
5	Denmark	0.925	80.4	19.2	12.7	44519	13	6
5	Singapore	0.925	83.2	15.4	11.6	78162	-3	4
7	Netherlands	0.924	81.7	18.1	11.9	46326	8	6
8	Ireland	0.923	81.1	18.6	12.3	37065	11	8
9	Iceland	0.921	82.7	19	12.2	43798	20	9
10	Canada	0.920	82.2	16.3	13.1	42582	12	9
10	United States	0.920	79.2	16.5	13.2	53245	1	11

Source: United Nations Human Development Reports: 2016 HDR Report.

http://hdr.undp.org/en/composite/HDI
Note3: GNP in PPP international dollars.
Note4:

Difference between rank by GNP per capita and by HDI value.

A negative value means the country is better ranked by GDP than HDI.

Do the limitations of GDP matter for our study of macroeconomics? Probably not. We will be examining changes in real GDP from year to year, for the most part. As long as the importance of nuisance and non-marketed outputs, life expectancy, literacy and inequalities do not change dramatically in that time frame, changes in measured real GDP will provide good measures of changes in economic activity and performance. Changes in per capita real GDP will also provide measures of changes in standards of living.