If in 1984, measured GDP in Canada was $400 billion, and in 1985 it was $440 billion, explain why we cannot necessarily conclude that the typical Canadian's welfare has improved by 10-percent over the year.
To determine whether the typical Canadian's welfare has improved based on GDP alone, we need to consider a few factors. GDP (Gross Domestic Product) measures the total value of goods and services produced within a country's borders.
However, GDP alone does not provide a comprehensive picture of the well-being of the typical Canadian because:
1. Population growth: Changes in GDP do not account for population growth. If the population increased between 1984 and 1985, the increase in GDP could be attributed to a larger workforce, without necessarily indicating an improvement in the average Canadian's welfare.
2. Income distribution: GDP growth does not consider how the generated income is distributed among the population. If the increased GDP is mostly concentrated in a small segment of the population, it may not reflect an overall improvement in the typical Canadian's welfare.
3. Inflation: Changes in GDP do not account for inflation, which measures the increase in prices over time. If the increase in GDP mainly comes from rising prices rather than increased production, the typical Canadian's purchasing power may not have improved.
To properly assess the well-being of the typical Canadian, additional measures such as per capita GDP, income distribution analysis, and inflation-adjusted figures need to be considered. Per capita GDP divides the total GDP by the population to calculate the average per person. Income distribution analysis examines how income is distributed across different income groups, highlighting whether different segments of the population have benefited. Adjusting GDP figures for inflation allows us to see the changes in real terms rather than nominal terms.
By considering these additional factors along with GDP growth, we can gain a more accurate understanding of the changes in the typical Canadian's welfare.