Living Standards

Real GDP per Capita

Problems with the use of GDP per capita

• Real GDP per capita is an average. Not everyone can benefit from a rise in average national income. Some might receive a higher income rise than others while some might not receive any rise in their incomes.
• Not all increase in income is good. Example: increase in consumption of tobacco or increase in output of police services.
• Real GDP might understate the products available due to an undeclared economy and non-marketed output.
• It might overstate the quality of output. If output rises but working conditions deteriorate then Real GDP per capita might overstate the condition of living standards.

Comparing Living Standards Between Countries

• Real GDP per capita is a popular measure as it eliminates the difference in population and adjusts for inflation.
• It is not the best measure of comparison because:
  • There are differences in how income is distributed in the country.
  • Size of informal economy is different in each country.
  • The composition of output in each country is different.
  • The quality of output in each country is different.
  • Environmental conditions in each country are different.
• Real GDP is measured by every country in their home currency which creates a problem of comparing Real GDP per capita across countries. Economists use a measure called Purchase Power Parity (PPP) to resolve this issue.

Purchasing Power Parity (PPP): an exchange rate based on the ratio of price of a basket of products in different countries. 

Human Development Index (HDI)

• Was developed by the United Nations Development Program (UNDP) in 1990.
• It is a broader measure in comparison to GDP per capita.
• It includes the following:
  • GDP per capita
  • Life expectancy at birth
  • Mean and expected years of schooling
• Criticism of HDI:
  • HDI could be high for an educated person who lives long in a prison.
  • Does not include other important factors of well-being such as political freedom and environment.
  • Does not include difference in life expectancy and education experienced by males vs females and urban vs rural areas.

Human Development Index (HDI): a measure of living standards that takes into account income, education and life expectancy.

Genuine Progress Indicator (GPI)

• Developed in 1955.
• It adjusts for changes in income distribution. If poor people benefit from the rise in national income more than the rich, then its value rises and vice versa.
• Items that reduce living standards like the cost of crime, traffic accidents, carbon dioxide emissions, depletion of non-renewable resources, and loss of forests.
• Items that enhance the living standards are added such as the value of housework, volunteer work, and increases in leisure time.

Genuine Progress Indicator (GPI): a measure of living standards that takes into account a variety of indicators including income, leisure time, distribution of income, and environmental standards. 

Causes of Differences in Living Standards and Income and Wealth Inequality

• Incomes may be unevenly distributed between households within the country due to uneven holdings of wealth, differences in the composition of households, and differences in opportunity and ability to earn an income.
• Households with a higher number of earners earn more than those who have fewer members working.
• Higher-skilled workers earn more than those with lower skills.
• Full-time workers earn more than part-time workers.
• Differences in wealth inherited, their savings, and entrepreneurial skills.