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4.6: Per Capita Real GDP

  • Page ID
    11807
  • 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 Figure 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.

    \[\text{Per capita real GDP} = \displaystyle\frac {\text{Real GDP}}{\text{Population}}\]

    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.

    Screenshot 2019-03-04 at 20.48.23.png

    Figure 4.6: Quarterly Rates of Growth in Per Capita Real GDP in Canada, 1982-2013
    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 4.8 shows HDIs for the top ten countries in 2011, according to the Human Development Report, 2011. The second last and last columns in the table are of particular interest. The second last column shows the HDI adjusted for national inequalities in the distributions of income, life expectancy and education on country standards of living. The underlying argument is that more equal distributions of income, life expectancy and education contribute to higher standards of living. The last column in the table records the effects of inequality on a country’s ranking according to the HDI. By these data, distributional inequalities reduce the ranks of three countries: the Netherlands by 1 plan, Canada by 7 places and United States by 19 places. By Inequality Adjusted HDI’s the Netherlands would rank 4th in 2011, Canada would rank 13th and the United States would rank 23rd. Clearly per capita real GDP is not the only indicator of standard of living.

    Screenshot 2019-03-04 at 20.56.11.png

    Table 4.8: Top Ten Countries Based on the United Nations Human Development Index
    Source: Human Development Report 2011, Statistical Tables, Table
    3, p. 135. New York: United Nations Development Programme,
    hdr.undp.org/en/reports/global/hdr2011/, and Regional and National trends
    in Human Development Indicators
    1980-2011.

    Do these 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.

    Conclusion

    In this chapter we have looked at indicators of macroeconomic activity and performance, and the measurement of macroeconomic activity using the national accounts. We have not examined the conditions that determine the level of economic activity and fluctuations in that level. An economic model is required for that work. In the next chapter we introduce the framework of a basic macroeconomic model.