I don't know about you, but I liked my last blog. It was apt and to the point with a good flow. One thing I should have pointed out is the limitations of GDP as an indicator.
Is GDP overhyped? The short answer is yes.
GDP as an indicator is as macro as it gets. It is all-encompassing; it gives an idea of the country's productivity, period. It's not an exact figure either, just an idea. But it's the best indicator for comparing countries on a macro scale.
The issue is since this indicator is well-known and widely talked about, most policies are focused on improving it or, at the very least, maintaining it.
A recession is coming!! How do you know? The GDP is declining. You're not wrong, but you know what I mean?
Let me throw some statistics at you: Qatar's GDP per capita is around 100,000 USD, while Japan's per capita is 50,000 USD. On the face, Japan's average person lives half as luxuriously as a Qatari. In reality, it's the opposite. The average Japanese has twice the net worth of a Qatari.
Here, we stumble on one of the limitations. Middle Eastern countries have huge GDPs cause of all the oil reserves. A single industry has dominated the country's GDP. GDPs don't tell us how wealth is divided between sectors or people. Social inequality is something that needs to be measured separately.
GDP favours richer countries. The poorer the country is, the harder it is to calculate its GDP since most of its productivity is from informal sources. That lady who sells flowers by the temple? Her income should count to the GDP, but does it? Probably not.
Krishnamurthy Subramanian, India's ex-CEA, cited the formalisation of the informal sectors as one of the driving forces for India to achieve a GDP of 55 Trillion USD by 2047.
Can you form an opinion about the standard of living by looking at the GDP? Not exactly.
To compare the standard of living between the two countries, firstly, we'll need to look into the industries contributing to the GDP, ensuring we don't make a Qatar - Japan error. Secondly, we'll need to account for PPP, Purchasing Power Parity. Thirdly, of course, we'll need to account for the population.
Purchasing Power Parity is a consequence of the Balassa - Samuelson effect. We start by making a distinction between tradable and non-tradable goods/services. An iPhone is tradable; it costs nearly the same across countries, but what about a haircut? A haircut in India costs nowhere near the same as one in the US. That service is non-tradable; getting a haircut in India while in the US is impossible.
You'll notice the same effect for most services in poorer countries. Since services are cheaper, a chunk of your living expenses become more affordable, i.e. it takes less money for you to sustain a life in poorer countries. In a competitive market, this becomes apparent in terms of wages. If wages are lower, a chunk of the production cost of making indigenous goods becomes cheaper, further aiding in affordability.
PPP talks about how the same basket of goods in one country costs a lot more than another, i.e. you have more purchasing power in poorer countries and possibly a better standard of living.
GDP with PPP correction per capita gives a much clearer picture of the standard of living than just GDP.
India, for example, ranks 5th in GDP but 3rd with PPP correction.
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