Insights & Analysis

March 4, 2020

How well does GDP per capita really measure our well-being?

When economists try to determine if a country is ‘prosperous’, the most commonly used indicator is GDP per capita, which is a measure of the total value generated by an economy in a given year divided by the number of people living in it.

Why do we use GDP per capita to measure well-being?

The reason this is such an important indicator is that higher economic output is usually associated with higher household incomes. In other words, when an economy generates more value per person per year, that typically translates into more money for those working in that economy.

Most often, the indicator economists use to determine the prosperity, or well-being, of a country or region is GDP per capita. But, how well does GDP per capita really measure our overall well-being? @bizcouncilab investigates. Click To Tweet

Higher incomes mean families can spend more on the things they value. They can afford groceries and rent without financial stress, get the dental care they need, send their children to university, and maybe even take a family vacation. Meanwhile, it means governments have a greater capacity to provide public services such as education, health care, and other social assistance programs. As a result, higher GDP per capita is often associated with positive outcomes in a wide range of areas such as better health, more education, and even greater life satisfaction.

GDP per capita is also commonly used to measure prosperity because it’s relatively easy to compare across countries and to adjust for different levels of purchasing power from one to the next. For instance, purchasing power-adjusted GDP per capita in Canada is about USD$48,130 which is 268% or nearly three times the world average. At the same time, Canada lags many advanced economies by a wide margin. GDP per capita in Singapore, for example, is about USD$101,532 and in the US, it’s US$62,795.

Limitations of GDP per Capita as a Measure for Prosperity

Though it is tempting to use GDP per capita as an all-encompassing measure of prosperity, it does not tell the full story. Our view of shared prosperity is much more comprehensive. It includes economic opportunity, environmental sustainability, and the safety and health of our communities. GDP per capita is one important indicator of prosperity, but it has limitations when viewed alone.

Though it is tempting to use GDP per capita as an all-encompassing measure of prosperity, it does not tell the full story.
GDP & Income

For instance, though GDP per capita is an indirect measure of average income, it does not necessarily mean that the ‘typical’ person in the economy earns this amount. In a province like Alberta, GDP per capita tends to be much higher than average household income because of the tremendous value generated by our capital-intensive oil and gas industry.

In addition, GDP per capita has little to say about income distribution. For instance, suppose we had a 10-person economy with a total GDP of $1 million. While per capita GDP suggests that all ten people enjoy six-figure salaries, there could just as easily be a situation where one person earns $900,000 while the remaining nine make a little more than $11,000 each.

Likewise, if GDP per capita is growing, that growth could be accruing to the already wealthy with no benefit to the typical family. To better understand how different socioeconomic groups are faring, we need to use an indicator like the Gini Coefficient which measures the amount of inequality in an economy.

GDP & Economic Opportunity

Similarly, though GDP per capita measures economic outcomes, it does not consider the amount of economic opportunity – the chance to ‘get ahead’ in life and climb the social ladder. We would need to calculate Social Mobility to determine if the system is fair and equitable or just perpetuating poverty and wealth from one generation to the next.

GDP & Environment

Another major limitation is that it ignores the impact on the environment. If consumers spend more on gas-guzzling vehicles and fast fashion, this could increase GDP per capita meanwhile harming the environment and future prosperity. We should also, therefore, keep a pulse on factors like air quality and CO2 emissions to better understand long-term costs and what is at risk.

Beyond this, there are numerous factors that affect our prosperity and well-being that are not captured such as the value of leisure time, the cost of stress, our sense of belonging and purpose, individual freedom, and social justice. The reality is that many of these factors can be difficult to define and quantify, though most would agree they each have a huge impact on our shared prosperity. 

Shared prosperity is simply too complex, multifaceted, and comprehensive for any single indicator. This means we can only fully understand prosperity if we look at GDP per capita along with a broad range of other measures to ensure our community is lush with meaningful work, dynamic opportunity, healthy communities, and, ultimately, all the things that enable us to live our best possible life.

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In the spirit of truth, reconciliation, and respect, we honour and acknowledge the lands upon which we live and work as guests, including the traditional territories of the First Nations in Treaties 6, 7, and 8 and the citizens of the Metis Nation of Alberta. We thank the First Peoples of this land, which we now call Alberta, for their generations of stewardship of the land, and we seek to walk together in the spirit of truth and reconciliation to build a shared future for all in Alberta.

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