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The connection between Gross Domestic Product (GDP) and standard of living lies in the fact that the GDP serves as an economic tool for measuring the standard of living in a country. The standard of living may either be high or low, depending on the GDP output or configuration for the region. There are several factors that may contribute to the increase or decrease in the GDP and the standard of living.
One factor that may affect the GDP and standard of living is the effect of inflation, where there is a surplus of money in the economy. This leads to a situation in which the money will lose its value to the degree that it will not buy as much as it did before. For instance, if a family of four could buy sufficient monthly groceries in the past for $1,000, the effect of inflation would cause this amount of money to purchase less groceries than before. When this happens, the family might have to increase the monthly expenditure on groceries to maintain their previous standard of living, or they may have to cut back on some of the items on the grocery list.
Another way in which GDP and standard of living are related can be seen in a situation where excessive demand for products leads to scarcity. In the same way that this will reflect negatively on the GDP, it will also negatively affect the standard of living for citizens. When this type of situation occurs, the GDP level may rise to an unsustainable level, which is often an indication that a depression will follow suit if nothing is done to curtail the high expenditure.
In cases like this, the government may seek to reduce the excessive demand for services and final goods by introducing prohibitory interest rates. Increases in interest rates normally curtail the demand for final products, causing a response from consumers in the form of borrowing less money from banks and other credit institutions. This may affect the standard of living for certain sections of the consumer base that depend on credit and loans for most of their purchases.
GDP and standard of living are also connected in the sense that if the rising level of GDP is not monitored, it could lead to a period of recession. In economic cycles, recessions usually follow economic booms. When there is a recession, both the GDP and standard of living fall.