Economic Development · 4 question types
Past paper frequency (2018 to 2024)
This topic accounts for approximately 11% of your exam marks.
GDP per capita limitations, HDI components, and living standards comparisons appear regularly in Section B; typically 8 to 12 marks.
GDP per capita is Gross Domestic Product (the total output of an economy) divided by the population. It is the most-used single indicator of average income and is often used as a proxy for living standards.
The formula:
GDP per capita is widely available, comparable over time within a country, and broadly correlated with most aspects of wellbeing. But as a measure of living standards, it has four well-known limitations that examiners specifically test.
GDP per capita is an average. It says nothing about how the income is distributed. A country with $30,000 GDP per capita could have:
Both produce the same headline figure, but the living standard of the typical citizen is wildly different. Using GDP per capita alone makes inequality invisible.
GDP only counts goods and services traded for money. It misses:
A higher GDP that comes from longer working hours, more pollution and higher crime is not really a higher standard of living.
Comparing GDP per capita across countries requires converting one currency into another, usually via the exchange rate. Two problems arise:
The fix is Purchasing Power Parity (PPP) adjustment.
Purchasing Power Parity (PPP) is a method of converting national incomes that adjusts for differences in the cost of living between countries, so that a given PPP-dollar buys roughly the same basket of goods everywhere.
PPP-adjusted GDP per capita is the proper figure to use for cross-country comparisons.
GDP treats all output as equal. £1 billion of weapons production adds the same to GDP as £1 billion of healthcare. But the welfare impact is very different. A country whose GDP is growing because of military or pollution-intensive industries may not be improving its citizens' living standards at all.
GDP per capita is not inaccurate as a measure of average money income. The limitations are about what it leaves out, not about errors in the calculation.