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Tom Rexton

How accurate is GDP/capita

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Mr. Salsman,

How accurate is GDP per capita as a measure of living standards? Is there a more accurate measure of living standards?

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This is Richard Salsman's reply to the question posed by Tom Rexton

On a stand-alone basis per capita GDP is a poor measure of living standards, primarily because GDP itself is a poor measure of them. GDP (or "Gross Domestic Product") is allegedly a measure of a nation's productive output, but GDP is not even a valid measure of that. For example, GDP excludes a vast amount of intermediate production; it only counts the value of retail goods. GDP also includes government spending, which is certainly not a measure of wealth-creation. In addition, GDP subtracts a nation's imports of goods and services and adds its exports of goods and services; thus imports of cars, clothes, appliances, televisions, computers and electronic equipment - which clearly add to our living standards - are excluded from GDP. In general, it might be said, without too much error, that if per capita GDP in the U.S. today is ten times higher today than it was a decade ago - or if per capita GDP in the U.S. today is ten times higher than in present-day Canada - then U.S. living standards are roughly ten times higher than a decade ago and ten times higher today than in Canada. But still, these are very crude measures.

The best way to measure living standards is to dispense with "aggregate" measures (like GDP) and become very concrete about it. For example, measure per capita ownership of cars, houses, appliances, clothes, air-conditioning, etc. Consider, as well, such measures as the average square-foot living space in people's homes - or how many total hours they must work in order to afford tangible items - or their average life expectancy - or the average infant mortality rate - or the per capita frequency of various diseases - or the average number of years people spend in retirement - or the portion of time and money they spend on entertainment and vacation - or their average in-take of various nutrients. To my knowledge no long-term, standardized "index" of living standards - using these variables - currently exists. But some fascinating studies - including "snapshots" of living standards in various countries, so measured, at various points in history - have been published;  see, for example: 1) Julian Simon, editor, "The State of Humanity" (1995); 2) Michael Cox and Richard Alm, "Myths of Rich and Poor" (1999); and 3) "Understanding Poverty in America," January 2004 (http://www.heritage.org/Research/Welfare/bg1796.cfm).

Richard M. Salsman, CFA

President & Chief Market Strategist

InterMarket Forecasting, Inc.

1777 Fordham Boulevard - Suite 202-4

Chapel Hill, North Carolina  27514

EMAIL: RMSalsman@intermarketforecasting.com

WEB: intermarketforecasting.com

IFI is an investment research and forecasting firm that quantifies market-price indicators to guide the asset allocation decisions and trading strategies of pension plans, asset managers, financial institutions and hedge funds.

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