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GDP is the single most useful number for describing the size and growth of a country's economy. An important thing to consider, though, is how GDP is related to the standard of living. After all, to the citizens of a country, “the economy” is an abstraction. The standard of living reflects their daily experience and their overall level of happiness and well-being.
GDP per capita, which is GDP divided by the size of the population, measures an average individual’s share of the national GDP, and thereby provides an excellent measure of standard of living within an economy. Because GDP is also equal to the total income in an economy, GDP per capita can be thought of as the income of a representative individual. In general, the higher GDP per capita in a country, the higher the standard of living.
GDP per capita adjusts for differences in population size across countries. If a country has a large GDP and a very large population, each person in the country may have a low income and thus may live in poor conditions. On the other hand, a country may have a moderate GDP but a very small population and thus a high individual income. GDP per capita is the measure to use when we want to compare standards of living across different countries. As with GDP, however, GDP per capita should be adjusted for inflation. The true measure of a nation’s standard of living is real GDP per capita, not nominal GDP per capita.
