Application Exercise 6d: Economic growth and material living standards
- The completed table is included above.
- Material living standards fell in years 3 and 4 this is because real GDP per capita (which is a common measure of material living standards) fell from $11,000 to $10,000 in year 3 and then again from $10,000 down to $9625 in year 4.
- Material living standards will fall when the rate of population growth exceeds the rate of economic growth. This is highlighted in the table, with population growth of 10% in year 3 exceeded economic growth of 0% and real GDP per capita fell accordingly from $11,000 down to $10,000. Similarly, over you for, population growth of 9% once again exceeded economic growth which was 5%, leading to a fall in real GDP per capita from $10,000 down to $9625.
- The reverse occurs when the rate of economic growth exceeds population growth. This is highlighted in year is 5 and 6. For example, over the course of year 5, economic growth of 10% exceeded population growth of 8% which resulted in real GDP per capita increasing from $9625 up to $9773. Similarly, over the course of year 6, economic growth of 15% exceeded population growth of 8% which resulted in real GDP per capita rising from $9773 to $10,436.
- There are several reasons why changes in real GDP per head (or per capita) will not adequately reflect the changes to living standards. First, GDP in itself is not entirely 100% accurate in terms of its ability to measure the real changes in the value of production income and expenditure that occurs in an economy. For example, there are measurement problems that prevent GDP from capturing all forms of economic activity that take place, such as black market activity or services provided within the home. Second, real GDP per head only provides a measure of material living standards (i.e. the ability to purchase goods and services). In reality, our living standards are determined by much more than our ability to access goods and services. There are numerous nonmaterial factors that impact on our living standards, such as exposure to crime, the quality of the environment, freedom of expression etc.