Answer to Question #1789 in Macroeconomics for jenille
What are the problems involved in using national income measurement to determine living standards of a country?
The standard of living of the population is determined by GDP per capita There are several problems in determining the living standards using GDP or national income. First, there is inequality in income, in some countries, even very large, which makes it impossible to determine the actual standard of living of most citizens, and shows only generalized, aggregated index. Another problem is the shady economy. If we talk about Eastern Europe or former Soviet Union, in these countries, this problem is very important. Accordingly a large amount of money, which must be paid as taxes, does not fall into the budget. This situation distorts the picture of the actual level of income and thus their standard of living. Another problem is globalization and internationalization of economy and the world in general, which complicates the calculations under the relevant indicators. It should be noted that an important place has a migration, and the money that migrants send home. These funds are not always reflected in income and therefore not taxable, leading to a shortfall in state tax payments, which also affects the level of GDP, and hence the nominal standard of living, which under much different from the real. This are the main problems involved in using national income measurement to determine living standards of a country.