Economists Compare Living Standards Between Countries and Discuss the Difficulties of Making Such Comparisons.

Explain why economists compare living standards between countries and discuss the difficulties of making such comparisons.

How do we gauge an individual rich or poor? Well a wealthy individual is termed as one who accumulates substantial wealth compare to others in his/her community in equal terms. Similarly in economics, “a country’s wealth refers to the value of it’s asserts owned minus the value of its liabilities owed using equal prices & currency. Generally, economists measure a nation’s living standards with another by calculating the real GDP” (Jacques, 2009).

By using the real GDP, we can exclude any rise in cost of living or price increases in a period during comparison. Calculating the real GDP has its own limitations as it not perfect measure for economic welfare.

The first limitation is the exclusion of production activities like meals preparation, child care, cleaning the house among others, around the household. This exclusion gives a wrong estimation on GDP growth rate.

Let’s take an example comparing the United States (US) & China. The number of employed women in US is more than in China & as well as families eating out. Child care & home produced food were part of household production are being measured as part of GDP, So real GDP is considered high than real GDP inclusion of home production thus giving wrong indication of the total production.

The second limitation is the underground economic activity. This could be a legal or illegal activity that goes unreported for tax avoidance. Activities like gambling, prostitution, drug dealing, work done by illegal immigrants, smuggling and even growing food at home. Observers offer suggestions that government regulation and high taxes are the reasons why certain economic activity goes underground.

So any rise in GDP will include these activities which contribute to wrong gauge of economic welfare.

The third limitation is health & life expectancy. Rise in real GDP indicates rise in life expectancy facilitate services like medical research & health care to name a few. However every year we face new illness/diseases which are life threatening. When add these harmful causes to account, the real GDP growth gives a wrong gauge as it exaggerate the standard of living improvements.

The fourth limitation is leisure time. Commonly known as “Free Time”, is not part of

GDP however it is important aspect of welfare. Along the years, leisure time is given more priority with more vacation leave, lesser working hours & early retirement age.

The fifth limitation is environment quality. Environmental damage is not deducted from the real GDP.

As we compare USA & China, Pollution, a