Causes of Limitations of GDP Per Capita as an Indicator of Economic Development

Abstract

This chapter discusses the viability of gross domestic product (GDP) per capita in purchasing power parity as an indicator of economic development and well-being and estimates the factors which diminish its ability to represent the level of life. Firstly, we theoretically outline the factors that might be undermining GDP per capita’s ability to serve as a measurement of well-being and debate other development indicators. Subsequently, we confront GDP per capita with the most well-known development indicator – Human Development Index (HDI) – and calculate the deviations between those two indicators. To empirically evaluate the potential limitations of GDP in measuring development, we regress the development-GDP gaps on an array of economic, social and political variables employing a broad panel dataset and modified fixed effects estimators. The results reveal that factors such as income inequality and level of economic freedom cause negative gap between development and GDP; the size of shadow economy has positive impact on deviation of HDI from GDP levels, while certain sociocultural factors such as higher fertility rates and alcohol consumption have negative effect on the dependent variable.