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Although comparing the GDP of different countries is naturally problematic due to various cultural differences, there are two main difficulties that arise; there is no common legal tender, necessitating currency conversion, and the GDP is only a rough reflection of a population’s true measure of how well or how poorly a person or group of people live in terms of having their needs and wants met (“Standard of living dictionary definition,” n.d.), (“OpenStax CNX,” n.d.). A society’s standard of living combined with quality of life supports the human development index, which Pakistani economist Mahbub ul Haq created in 1990 (Bennett, 2016). The human development index emphasizes that people and their capabilities should be the final criteria for assessing the development of a country, not economic growth alone (“Other resources,” n.d.). Variations include differences in the distribution of income, currency conversion and difficulty assessing the true value of public goods like defense and transport infrastructure as well as merit goods, such as healthcare and education (Online et al., 1971). For a comparison of gross domestic product of different countries, issues of currency and the human development index must be addressed.
Measuring GDP means counting up the production of millions of different goods and services resulting in a total dollar value. These products include everything from cell phones to cars. When GDP is expressed in common currency, comparisons can be made with each country’s GDP per capita by dividing GDP by population. Purchasing power parity conversion factor is the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as a U.S. dollar would buy in the United States. The price level ratio of PPP conversion factor (GDP) to market exchange rate of various countries can be found in the Data table of the World Bank (“Data,” 2016).
Large GDPs associated with large populations can be misleading (“OpenStax CNX,” n.d.). Many goods are under the radar of governmental control, such as services rendered in the so-called ‘hidden economy’; to avoid tax, transactions may go unrecorded and excluded from official statistics (Online et al., 1971). Raw GDP data does not reflect things like leisure, and the values different societies place on products. GDP statistics can be re-calculated in terms of purchasing power, referring to the quantity of the currency needed to purchase a given unit of a good or common basket of goods and services. Purchasing power is determined by the relative cost of living and inflation rates in different countries (Online et al., 1971). Countries have differences in the hours worked to reach a certain level of income, variation in international prices as well as difficulty of assessing true values of public goods.
A more realistic measure of gross domestic production involves the human-development-index, which takes into account a summary measure of average accomplishment in key dimensions of human growth: a long and healthy life, being knowledgeable and having an adequate standard of living. The HDI is the geometric mean of normalized indices for each dimension. Raw data does not take into account the human element of economic growth. The HDI uses the logarithm of income, to show the diminishing importance of income with increasing gross national income. The scores for the three HDI dimension indices are then aggregated into a composite index using geometric mean (“Other resources,” n.d.). Human development plays an important part in the growth of any economy; availability of basic human needs, such as food and shelter, support the well-being of a society, and thus a growing gross domestic product.
As can be seen, comparing the GDP of different countries has difficulties related to differences in currencies, requiring conversions according to the World Bank database, as well as living standards. Gross domestic production growth is dependent upon more than simple statistics; the intention of the human-development-index is to emphasize that people and their capabilities should be the final criteria for assessing the development of a country. Comparisons of the economic growth of a country are to be measured in more than just raw numbers.
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