Per Capita GDP and Living Standards

A nation's real GDP, the total output of the economy adjusted for inflation, is often considered a measure of its income because the production of goods and services generates income for workers and owners of firms. When a customer spends two dollars to purchase a bottle of soda, each penny of that two dollars goes to someone in the form of income: the money paid to the producers of the soda and the bottle, the employees of the store, the driver who delivered it from the factory to the point of purchase, the stockholders of the soda company. Therefore, the growth rate of real GDP can be used to see what is happening to output in an economy as well as to measure income.

To look at how economic growth impacts the people living in a country, it may be more useful to consider how living standards in a country have changed. This refers to the level of material comfort that people living in a country have, such as the quality and availability of food and housing. The real GDP per capita reflects living standards because it is a measure of the output per person in a country and is calculated by dividing real GDP (RGDP) by the population. This gives a better idea of the average level of income in the economy. For example, the 2017 GDP of the United States was $18.5 trillion, whereas the GDP of Luxembourg was only $63.5 billion. However, the United States has a much larger population than Luxembourg, so a smaller GDP doesn't mean that people are worse off. In fact, the per capita GDP in Luxembourg was $108,000, while the per capita GDP in the United States was just over half that at $57,000. This shows the importance of having different measures to discuss an economy and to understand what that means for the population. When considering the impact on individuals in an economy, economic growth is measured by the percentage change in real GDP per capita from one year ($t$) to the next ($t + 1$). However, even real GDP per capita does not provide a complete picture of the well-being of all residents within a country. Not every person in an economy has the same income, so some people will make more than the real GDP per capita and others will make less. Depending on the distribution of incomes in a country, some people may be much better or worse off than what is reflected in the real GDP per capita. Other measurement standards that account for other aspects of the economy, such as equal wealth distribution throughout the population, provide a more complete description of the standard of living for a country's population.

Economic growth is important in determining future living standards of a population. It indicates developments such as technological improvements, more use of natural resources, and increased worker productivity, all of which can increase the real GDP. If a country has a growing population, then the real GDP must increase in order for the real GDP per capita to even stay the same. If the real GDP does not grow, or if it grows at a slower rate than the population, the real GDP per capita will go down and living standards will decline accordingly because people will, on average, have less purchasing power.

Even without a growing population, economic growth is important for maintaining and improving living standards. Increasing the real GDP enables people on the low end of the income distribution to be lifted out of poverty and allows the government to increase spending on improving infrastructure. It can also allow more people access to technological developments, such as electricity or cars during the 20th century in the United States, which then become normalized and raise the expected standard of living in a country.