6. Cross-country comparisons are rendered difficult by several factors: some countries spend a lot on housing to deal with a harsh climate; leisure-loving societies do not have their leisure valued; exchange rates used to express GDP figures in common currencies do not accurately reflect cost-of-living differences; and differences in income distributions are ignored.
Despite these problems in using GDP to measure an economy's welfare and to compare it to other economies, most economists are comfortable using GDP figures for comparisons over time, such as measuring an economy's growth rate. So long as the size of the underground economy is stable, there are no dramatic changes in crime and pollution, and the fraction of an economy's economic activity that appears on markets is relatively constant, growth measures should paint an adequate picture of economic progress.
But economic growth is not the only way of measuring progress, and many believe that the high profile of GDP has served to divert attention from other forms of human progress. One respected alternative measure is the human development index, developed in 1990 by the United Nations Development Programme. It is an index calculated as an equally weighted average of relative performances on measures of life expectancy, educational attainment, and income. Canada and the United States are the top countries by this measure.
Just as a company would be unwise to chart its course by looking at its cash flow without looking at its balance sheet, so would a country be unwise to focus on GDP without looking at its its worth. The World Bank has ranked countries by per capita wealth, calculated by estimating the value of each country's natural resources, machinery, buildings and other man-made capital, and human resources. By this measure the wealthiest countries are those with few people and lots of oil, like the United Arab Emirates, and countries with few natural resources but substantial human ingenuity, such as Switzerland. Resource-rich Australia and Canada top this ranking; the United States is twelfth, just behind Norway.
One of the most prominent ways in which GDP changes can be misleading is if the effects of overall price changes on this measure are not taken into account. Doing so produces the important distinction between real and nominal GDP.
2.4 Real Versus Nominal GDP
One way the GDP measure can increase is if the nation produces a larger physical quantity of goods and services, implying that more goods and services are available for distribution to participants in the economy. Such a change would be of importance to our standard of living. But GDP can also change simply because the prices of all goods and services rise, as they do during an inflation. In this case a larger GDP does not correspond to a larger physical quantity of goods and services. Typically, each year GDP increases for both reasons, so some way of distinguishing changes in GDP due to physical changes in output from changes due to price level changes must be found.
