Assess the limitations of using GDP to compare living standards over time

Edexcel AS-Level Economics Paper 2 June 2022 Extract

With reference to the fourth paragraph of Extract A, assess the limitations of using GDP to compare living standards over time. (10 marks)

1. GDP might not be the best way to compare living standards over time as it fails to account for changes in income inequality.
2. As the economy grows, income per capita increases.
3. As a result, consumer spending increases and aggregate demand increases, which causes inflation.
4. Low skilled workers will have less bargaining power compared to high skilled workers.
5. This means that real incomes are likely to fall for some workers, leading to greater differences in people's quality of life.

1. Secondly, increases in GDP are unlikely to capture changes in subjective happiness.
2. For example, as income increases, people might take on more stressful jobs and work longer hours.
3. There might be other ways to capture changes in living standards, such as surveys or a happiness index.
4. The extract mentions poor productivity, which could be as a result of high stress levels and possible burnout.

1. However, the extract mentions that 'government expenditure has been rising'.
2. Higher GDP suggests that the government would be able to generate more tax revenue through income tax, corporation tax and also VAT.
3. This means that the UK can invest more into services like healthcare and education, which should suggest that living standards are improving.
4. Additionally, GDP is arguably the most simple but effective way of comparing living standards over time as it can take inflation into account when being measured in real terms.

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