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GDP and Actual Individual Consumption

GDP and GDP per capita are the measures most commonly used to compare the economic size of countries and the economic welfare of their populations (when economic welfare is measured by the volume of individual goods and services consumed). But they are summary measures. GDP, for example, says nothing about the distribution of income within a country, while GDP per head has limitations as a measure of economic welfare. Not only does it cover the goods and services that resident households consume to satisfy their individual needs, it also includes services, such as defense, police and fire protection, that governments produce to meet the collective needs of the community, as well as gross fixed capital formation and net exports neither of which constitute final consumption.


A possible alternative to GDP would be individual consumption expenditure of households, but for the different ways health and education services are financed in countries.


In some countries, governments or non-profit institutions serving households (NPISHs) provide the greater part of health and education services and these expenditures are included in the individual consumption expenditure of government or NPISHs. In other countries, households purchase nearly all health and education services from market producers and these expenditures are included in individual consumption expenditure of households. In these circumstances, individual consumption expenditure of households is not the correct measure with which to compare the volumes of individual goods and services actually consumed in different countries. Household in countries where government or NPISHs are the main providers of health and education services will appear to consume a smaller volume of goods and services than households in countries where households pay directly for the bulk of these services.


To overcome this problem, the ICP has, from the beginning, added the individual consumption expenditures of government and NPISHs to the individual consumption expenditure of households to derive the consumption expenditure of the population. On a per capita basis, this is a better measure of economic welfare of households as it comprises only the individual goods and services that households actually consume. It covers all such goods irrespective of whether they are purchased by households themselves or are provided as social transfers in kind by government or NPISHs. Two decades later the concept was adopted by national accountants. It is referred to as actual individual consumption in the 1993 System of National Accounts (SNA).


ICP comparisons are organized so that both GDP and actual individual consumption of countries can be compared.