b) Explain the use of GDP figures as means of comparing countries (15m)
Gross Domestic Product or GDP is a measure of economic activity in a country. It is the total value of final goods and services produced within a country over a period of time (usually a year), regardless of who owns the factors of production.
When comparing countries, GDP is a reasonably good indicator of economic activity, however, there are some important aspects that it does not include and therefore GDP may not give us a true picture of a country’s well being. Some of these reasons are explained below.
Firstly, GDP does not include output that is not recorded or under-recorded. In countries there are many economic activities that are no officially recorded such as a person’s own work in repairing his own house, or food grown by a person and consumed by his family. Similarly, it does not include any work of charity done by a person, which helps to make a better society.
Secondly, GDP does not include external costs such as the costs to the environment of using resources (cutting trees, drilling oil) or the cost of pollution. These worsen the health of people, but are not included in GDP.
Thirdly, GDP does not include other quality of life issues such as longer working hours which may reduce the time that people have for leisure activities and have an impact on the stress levels. It does not measure the happiness levels of people.
Finally, when GDP measures the output of a country, it does not tell the difference between whether the output is made up of goods and services that are used by consumers or those that are used for military or defense purposes. If the output has a lot of defense goods, this would not improve the living standards of the people.
In conclusion, GDP does not measure the actual improvement in standard of living or the quality of life of people when comparing countries.