Question

Poor India Makes Millionaires at Fastest Pace India, with the world's largest population of poor people, created millionaires at the fastest pace in the world in \(2007 .\) India added another 23,000 more millionaires in 2007 to its 2006 tally of 100,000 millionaires measured in dollars. That is 1 millionaire for about 7,000 people living on less than \(\$ 2\) a day. a. Why might real GDP per person misrepresent the standard of living of the average Indian? b. Why might \(\$ 2\) a day underestimate the standard of living of the poorest Indians?

Short answer

Real GDP per person overlooks income disparity. $2 a day may underestimate the standard of living due to higher local purchasing power in India.

Step-by-step solution

Understand Real GDP Per Person

Real GDP per person is the total value of all goods and services produced in a country in a year, divided by the total population. It is often used as a measure of a country's economic well-being.

Consider Wealth Distribution

Real GDP per person does not account for how wealth is distributed among the population. In India, a large portion of wealth can be concentrated among a small number of millionaires, causing the average GDP per person to appear higher than it is for the majority of the population.

Explain Standard of Living

The standard of living refers to the level of wealth, comfort, material goods, and necessities available to a certain socioeconomic class or geographic area. In India, despite a high GDP per person, the standard of living for the average citizen might still be low due to income disparity.

Consider Purchasing Power Parity (PPP)

The \(2 a day figure might underestimate the standard of living because it does not consider local purchasing power. In India, \)2 might be worth more and can buy more goods and services than in other countries, thus providing a slightly better standard of living than the nominal amount suggests.

Use Local Economic Indicators

Using local economic indicators such as access to healthcare, education, and housing can give a clearer picture of the standard of living, as these factors directly affect the quality of life and may vary significantly from GDP per person or nominal income figures.

Key concepts

Real GDP per person

Real GDP per person is an economic measure that calculates the total economic output of a country, divided by its population. It is a standard way to gauge the economic wellbeing of a country. However, this measure can sometimes misrepresent the actual standard of living for the average citizen. For instance, in India, despite a high real GDP per person, many individuals live below the poverty line.
GDP per person does not account for who holds that wealth. A high GDP per person might suggest a wealthy society, but if wealth is concentrated among a small elite, the average person might still experience low living standards.

Wealth Distribution

Wealth distribution describes how wealth is shared among the population within a country. In India, while the number of millionaires is increasing rapidly, a significant portion of the population lives in poverty.
Even if a country's overall wealth is growing, it matters how that wealth is distributed. If the wealth is concentrated in the hands of a few, a high GDP per person won't translate into higher living standards for the majority.
In fact, widespread income inequality can contribute to social and economic problems, even if average income figures appear to be rising.

Income Disparity

Income disparity, or income inequality, refers to the uneven distribution of income across various participants in an economy. In India, despite rapid growth in the number of millionaires, income disparity remains a significant issue.
This disparity can lead to large segments of the population experiencing little to no economic gain, even when the country's overall economy is growing. Such inequality impacts everyday life, affecting access to education, healthcare, and basic necessities.
It's essential to address income disparity to improve the average standard of living and economic stability.

Purchasing Power Parity (PPP)

Purchasing Power Parity (PPP) is an economic theory that compares different countries' currencies through a 'basket of goods' approach. In simpler terms, it lets us understand what money can actually buy in different places.
For instance, living on \(2 a day in India might be very different from living on \)2 a day in the United States. When we look at local purchasing power, even small amounts of money can sometimes buy more goods and services in countries like India.
This means that though someone earns $2 a day, the actual value of what they can purchase could be greater than the nominal amount suggests, allowing for a better standard of living than the raw numbers indicate.

Local Economic Indicators

Local economic indicators offer insights into the well-being of the population, reflecting factors beyond just income. Important indicators include access to healthcare, education, housing, and employment opportunities.
In India, these indicators provide a more comprehensive picture of the standard of living. For example, while GDP per person might provide one view, access to clean water, quality education, and healthcare can significantly impact daily life and well-being.
Evaluating these local economic indicators helps to understand the overall quality of life experienced by the population, giving a clearer image than income figures alone.