GDP and Standard of Living: Are They Even Related?

How accurately does national GDP reflect a country’s quality of life? What are the flaws with benchmarking a national standard of living against GDP?

Gross Domestic Product (GDP) is commonly used as an indicator of a national standard of living. However, this is not necessarily the case. According to Vaclav Smil, the author of Numbers Don’t Lie, there are several reasons why we shouldn’t use GDP as a measure of a country’s quality of life.

Here’s a look at GDP and standard of living.

Gross Domestic Product Doesn’t Quantify Quality of Life

Gross Domestic Product (GDP) is the total annual value of all goods and services transacted within a country, and economists often use it to measure standard of living. Smil argues that GDP, while a decent measure of overall economic strength, is an unreliable measure of quality of life because it fails to take many factors into account. For one, GDP doesn’t factor in population size, which means it only looks at overall economic output and not output per citizen—thus, larger countries may have larger GDPs simply because they have more citizens, not because each citizen has a higher standard of living. GDP per capita (total GDP divided by population) would be a better measure to use for this. 

But GDP per capita still doesn’t factor in differences in cost of living and exchange rates between countries, making comparisons unhelpful. For that, we’d need to use GDP per capita at purchasing power parity, a measure that uses the prices of goods among different countries to compare currency valuation. Even this metric, however, doesn’t account for income inequality or the availability of social safety nets, huge factors in determining the average standard of living.

GDP and Standard of Living: A Closer Look

Smil argues that GDP can be misleading as a measure of standard of living because it doesn’t account for income inequality and other social aspects of a country that impact quality of life. In Naked Economics, Charles Wheelan lists some other factors GDP doesn’t take into account:

Unpaid work: Activities like raising your children or taking care of your elderly family members aren’t included in the GDP, yet this is important work that enhances quality of life.

Leisure activities: If people take time off work to do things they enjoy, this is bad for GDP but good for the person’s well-being.

Environmental impact: Though a country may be producing a lot of products and services, thereby raising its GDP, it could come at a major cost to the environment, which is detrimental to quality of life.
GDP and Standard of Living: Are They Even Related?

Darya Sinusoid

Darya’s love for reading started with fantasy novels (The LOTR trilogy is still her all-time-favorite). Growing up, however, she found herself transitioning to non-fiction, psychological, and self-help books. She has a degree in Psychology and a deep passion for the subject. She likes reading research-informed books that distill the workings of the human brain/mind/consciousness and thinking of ways to apply the insights to her own life. Some of her favorites include Thinking, Fast and Slow, How We Decide, and The Wisdom of the Enneagram.

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