NationMaster - The Importance of GDP Per Capita

Gross Domestic Product is the measure of the market value of all goods and services produced within a country during a specified period. GDP per capita is the share of individual members of the population to the annual GDP. Mathematically it is calculated by dividing real or nominal GDP by the number of population per year.

GDP per capita is indicator of the average standard of living of individual members of the population. An increase in GDP per capita signifies national economic growth. As such, economic planners and forecasters used the GDP per capita in monitoring economic growth trend for time series. It aids them in developing economic policies and development plans since the trend in GDP per capita at a specific period would clearly indicates whether the standard of living of the population is improving or not. A declining trend in GDP per capita indicates a sinking economy. Therefore, economic planners must come up with policies and infrastructures to facilitate economic growth. An increasing trend in the GDP per capita on the other hand, would prompt economic planners to implement various structural adjustments to prevent inflation rate from increasing due to increase in the purchasing power of the individual members of the population. Although faced with many issues and questions regarding the use of GDP as an indicator of standard of living, economic critics could not discount the advantages of using GDP to gauge the standard of living. For one, GDP is widely used and accepted in many countries. It is frequently updated and monitored by country specific statistical bodies. This enables country planners and economic think thanks to monitor the economic trend in a country of regular and periodic basis.

Despite this importance of GDP per capita as an indicator of economic growth, economic theorists still find flaws and problems with it as an economic tool. Among these problems are, the inability of GDP per capita to provide information about income distribution. Some income derived from the black market, or those which were not reported to the government were not accounted for. Likewise, GDP does not count volunteer work and services provided by social workers and charity institutions. It also do not account for reconstruction work and services done due to national disasters and calamities. Additionally, GDP as a statistical account is subject to fraud especially from those who are engaged in tax evasion processes. Some companies do not foreclose their true gross domestic transactions to lessen their tax payments.

Those are just some of the on going issues behind the value of Gross Domestic Product Per Capita and GDP as a whole. And whether GDP per capita would continue to be of value to economic planners remains to be since and would greatly depend on whether other indicators would be developed.

-- Cathie Madsen, Dec 2006.

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