Real GDP tells us how much output is produced in a country and whether more was produced in one year relative to another.
This matters because productivity ties directly to standards of living.
However, real GDP doesn't tell you everything you need to know to determine standards of living in a given country. Let's see why.
The Pizza Analogy
Suppose Julia orders 10 pizzas for a party and asks if that’s enough.
If 10 people are coming, that’s one pizza per person, which is likely enough.
If 200 people are coming, each person would get only one twentieth of a pizza, which is not enough.
Real GDP works the same way: it tells you how many pizzas (output) there are, but not what the average person will consume.
Real GDP per capita (real GDP per person) helps address this by dividing total output by population.
Real GDP per Capita: Definition and Calculation
Calculating real GDP per capita is straightforward: you take a country's real GDP in a given year and divide it by the country's population.
Formula:
\text{Real GDP per capita} = \frac{\text{Real GDP}}{\text{Population}}
Using real data (as an illustration):
Canada:
Real GDP ≈ 900{,}000{,}000{,}000
Population ≈ 35{,}000{,}000
Real GDP per capita ≈ \frac{900{,}000{,}000{,}000}{35{,}000{,}000} \approx 26{,}000 per person (about 26{,}000 per person).
Brazil:
Real GDP ≈ 950{,}000{,}000{,}000
Population ≈ 200{,}000{,}000
Real GDP per capita ≈ \frac{950{,}000{,}000{,}000}{200{,}000{,}000} \approx 4{,}750 per person.
From these numbers, we would expect standards of living to be much lower in Brazil than in Canada.
Canada Example
Real GDP: 9\times 10^{11} dollars (≈ 900{,}000{,}000{,}000)
Population: 3.5\times 10^{7} people (≈ 35{,}000{,}000)
Real GDP per capita: ≈ 2.6\times 10^{4} dollars per person (about 26{,}000)
Interpretation: Canada has a relatively high standard of living relative to many parts of the world.
Brazil Example
Real GDP: 9.5\times 10^{11} dollars (≈ 950{,}000{,}000{,}000)
Population: 2.0\times 10^{8} people (≈ 200{,}000{,}000)
Real GDP per capita: ≈ 4{,}750 dollars per person
Interpretation: Brazil is developing and growing quickly, but its standard of living is still well below Canada’s.
Limitations of Real GDP per Capita
It is an average, so it can mask disparities in the distribution of income within a country.
It is based on measuring expenditures in the marketplace, so it will understate incomes in countries that have a lot of non-market transactions.
Despite these faults, real GDP per capita still correlates highly with commonly used measures of well-being.
Non-Market Transactions and Income Distribution
Non-market transactions: activities not bought/sold in the marketplace (e.g., certain household work, informal economy).
When a large share of income is paid through non-market means or is distributed very unevenly, real GDP per capita may misrepresent the typical standard of living for an average person.
Distributional issues mean two countries with the same real GDP per capita could have very different living standards for many people.
Correlation with Well-Being Metrics and Real-World Relevance
Real GDP per capita still correlates highly with well-being indicators such as:
Literacy rates
Infant mortality rates
Life expectancy
This makes real GDP per capita a valuable tool in the economic toolkit for understanding the world we live in, even if it is imperfect.
Takeaway
Real GDP measures the total output and growth over time, but real GDP per capita provides a closer proxy for average living standards by accounting for population size.
Canada’s per-capita figure (~26{,}000) is higher than Brazil’s (~4{,}750), illustrating the gap in average living standards despite similar overall GDP magnitudes.
Use real GDP per capita as one of several tools to assess living standards, keeping in mind its limitations due to distribution, non-market activities, and other welfare indicators.