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GDP also doesn't show how wealth is spread, as there could be a big rich-poor gap in a country. Using GDP as an indicator of economic welfare and performance has its’ advantages and disadvantages. Although GDP is easy to compare, it shows which countries are rich and poor, not which countries need specific funding from the UN. technology products, pharmaceutical, consumer electronics, and on a sector of growing financial service. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.Return to top, IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials, * Please provide your correct email id. GDP doesn't account for quality of goods: Consumers may buy cheap, low-quality, short-lived products repeatedly instead of buying more expensive, longer-lasting goods. The biggest advantage of GDP per capita being used as an indicator of the standard of living is that GDP per capita is measured widely, consistently, and frequently. Disadvantages of the Real GDP Per Capita. It does not take into consideration cost of living of the person of their country, does not tell that how the wealth is spread in the country, does not take into consideration the details of earnings of the illegal workers in the country as well as the people who are working voluntarily in the country and does not give any indication on the spending power of the people of the country. There are several different advantages which are as follows: Limitations and drawbacks include the following: Real GDP per Capita helps in measuring almost everything that the country creates in the entire year and is used for comparison of the living standard amongst the countries over the time which reflects the feelings of all the citizens about how prosperous is their country but at the same time it does not take into consideration cost of living of the person of their country, does not tell that how the wealth is spread in the country, does not take into consideration the details of earnings of the illegal workers in the country as well as the people who are working voluntarily in the country and does not give any indication on the spending power of the people of the country. It is possible that the fewer people in the country have the maximum amount of wealth and there could be huge amount of the gap between the rich and poor of the country. GDP measures exactly what it is said to measure, so it's hard to have disadvantages, but for the purpose of answering: 1) It doesn't take into account illegal and black market trading. Sweden ISN'T Socialist! Over time, consumers could spend more replacing cheap goods than they would have if they had bought higher-quality goods in the first place, and GDP would grow as a result of waste and inefficiency. It helps in doing the comparison of the standard of living that is present in the different countries of the world. So, a major advantage of GDP is that it gives a clear indicator as to how well (or badly) an economy is doing. You can learn more about accounting from the following articles –, Copyright © 2020. (Source: John Sloman, 2006) GDP per capita is often used as an indicator of welfare in an economy. Globalization gives us many advantages and disadvantages. 1st advantage China has a more developed than in many developing countries and the balance of trade, China's much faster rate than India has been since the 1950s, manufacturing growth. The main advantages of using GDP as a measure is that you can gauge the overall output of your domestic factories. However, proper analysis of the entire process has delineated certain limitations of GDP per Capita in Measuring Growth. Real GDP reflects the value which has been adjusted for inflation while nominal GDP reflects the value without considering inflation (Abel, Bernanke and McNabb, 1998). Discussions above show that GNP per capita is an inadequate measure of economic development and social welfare. In 1980, when China and India in the gross domestic product (GDP) per capita more or less equal, China has enjoyed a strong advantage in manufacturing. Real GDP per capita calculates an average figure, due to this it is not possible to get the output from it regarding the distribution of the income among the people of the country i.e., it does not tell that how the wealth is spread in the country. © Copyright Get Revising 2020 all rights reserved. It is a Good indicator for showing the provision of the services. A rise in th GDP per capita generally means economic growth and a rise in standard of living for many of the people in the country. 806 8067 22, Registered office: International House, Queens Road, Brighton, BN1 3XE, geography - global development - how development is measured, Economics essay help on GDP and development! This has disenchanted economists about its efficacy as a true index of development and welfare. Answer and Explanation: Become a Study.com member to unlock this answer! Comparing cross-country data can indicate human welfare distribution. Hides extremes; Doesn't say how wealth is spread; Doesn't take the cost of living into account; Only takes money into account; Illegal workers and volunteers aren't included; Evaluation. Gross National Income figures are also closely correlated with social development – generally speaking the higher the GNI per capita, the … The formula for the calculation of the Real GDP per capital is as follows: Real GDP Per Capita formula = Real GDP / Population. … Thus unless national income is evenly distributed, per capita income cannot serve as a … One method of calculation is to consider GDP at its purchasing power parity (PPP). Is national happiness going to be a better way to measure economies than GDP, in 2020? Get Revising is one of the trading names of The Student Room Group Ltd. Register Number: 04666380 (England and Wales), VAT No. There are many advantages and disadvantages for GDP per capita. Inaccurate Data GDP only takes reported consumption into account. Often used to rank countries to establish a fair system of aid payments. », ~| Guess What? It is also a fairly decent indicator of average standard of living in a country. Due to this Real GDP per capita does not tell the exact details of the average income of the country per citizen in a year. Disadvantages. While this approach has advantages, there are also many criticisms on GDP as an indicator of standard of living or welfare. 806 8067 22 Therefore, GDP may overestimate living standards in a country. Not all economists are in agreement with the use of GDP as a main economic measurement tool. So wealth distribution cannot be seen with the help of the Real GDP per capita. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. GDP per capita is a measure that results from GDP divided by the size of the nation's overall population. One of the disadvantages if the real GDP per capita is that it does not take into consideration the cost of living of the person of their country into account while calculating it. Increases inequality: Sometimes spending more on gross national investments (GNI) per capita can hide the widespread inequality within the country. GDP per capita is the gross domestic product of a country, as divided equally between each citizen (capita)Advantage - represents a country's economic productivity and the advancement of its industryAdvantage - easy to rank and measureDisadvantage - doesn't include the contributions of the informal economy (70% in African cities)Disadvantage - can hide inequalities within a nation (e.g… Similarly, while GDP per capita is not a country’s measure of personal income, it can be used to make observations about it. GDP or gross domestic product has always served as the most important factor in the calculation of the overall economic condition of the citizens, their standard of living and growth. This value is one of the useful measures for the leaders of the world because it helps the leaders in deciding where the money needs to be spent to use it in the best possible manner. Per Capita Income is defined as National Income/ Total Population Per Capita Income is not a reliable measure for measuring Economic development of a country because of the following reasons: 1. Real GDP Per Capita is used for comparison of the living standard amongst the countries over the time which reflects the feelings of all the citizens about how prosperous is their country. In addition, it is often used to rank countries in order to issue aid payments. This has been a guide to what is Real GDP Per Capita and its definition. 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