Living Standards

• Living standards or standards of living refer to all the factors that

contribute to a person’s well-being and happiness
• Measuring Living Standards
• GDP per head/capita: this measures the average income per person
in an economy.
Real GDP per capita = Real GDP per head / Population
 Merits of using GDP per capita to measure living standards:

• GDP is a useful measure of the total production taking place in the

country, and so indicates the material well-being of the economy.
• It also takes population into consideration, adding emphasis on the
goods and services available to individuals.
• Since it is calculated on output, it is a good indicator of the jobs being
created.
• GDP data is readily available, and so is population data.
 Limitations of using GDP per capita to
measure living standards:
• It takes no account of what people can buy using their incomes. A
country with a high GDP per head may be no better off than a country
with a low GDP per head, if there are far fewer products to choose
from.
• Similarly, GDP doesn’t consider changes in technology that can have a
large impact on living standards. People might have had more income in
the last decade but they may not have benefitted from all the
technology available today.
• Distribution of income is very unequal in reality, so the GDP per head
isn’t Some people might be very rich while others very poor, but the
GDP per head will only give the average incomes.
• Real GDP excludes the unpaid work people do at home, for charities,
for voluntary organizations etc. Thus, it understates the total output.
• GDP also doesn’t differentiate between the positive and negative
values economies place on different output/expenditure.
• For example, if the output rises because the sales of tobacco, alcohol,
it might show in the records as a rise in GDP per head but might not
actually make people better off.
• This measure doesn’t consider leisure activities, health and education
levels, environmental quality etc. – measures that determine
people’s happiness and well-being.
 Human Development Index (HDI)
• It is used by the United Nations to compare living standards across the
globe, the HDI combines different measures into a single index to give a
HDI value from 0 (lowest) to 1 (highest). These are:
• Income index, measured using the average national income – GNI per
head, adjusted for differences in exchange rate and prices in different
countries (purchasing power parity).
• Education index, measured by how many years on average, a person
aged 25 will have spent on education (mean years of schooling) and how
many years a young child entering school can be expected to spend in
education in his entire life (expected years of schooling).
• Healthcare index: measured by average life expectancy at birth.
 The benefits of using HDI to measure
living standards:
• It takes into account some major indicators of living standards.
• It recognises that it is not just output or income that determines living
standards, but social factors too.
• It is a useful method to compare global living standards– it shows
clear patterns of living standards.
• It is very useful and reliable measure since it’s produced by the UN
and is thus also widely used and recognised.
 The limitations of HDI to compare living
standards:
• It combines a set of separate indicators into one, so a country with good literacy
rates and living standards but poor life expectancy can have a low HDI value.
• There are wide divergences in HDI within countries
• GNI per head doesn’t say anything about inequalities in income and wealth
within countries.
• It doesn’t consider other factors such as environmental quality, access to safe
drinking water, political freedom, crime rates etc. which are also important
indicators of living standards.
• The HDI information for all countries may not be available such as war-struck
countries where official government records are not kept or normal lives have
been disrupted.
• In the 2019 HDI index published by the UN, Norway comes first with
an HDI index of 0.954 while Niger comes last with an index of just
0.377 owing to very low levels of education and GNI per head.
• See the full list at http://hdr.undp.org/en/content/2019-human-
development-index-ranking
 The Genuine Progress Indicator
• The genuine progress indicator (GPI) is a national-level measure of
economic growth and prosperity.
• GPI is an alternative metric to GDP but which accounts for
externalities such as pollution.
• As such, GPI is considered to be a better measure of growth from the
perspective of green or social economics.
• Proponents suggest that GPI is a better metric as it provides a full
view of the health of a nation.
• Critics suggest that some GPI measures are too subjective, rendering
it a less effective tool for measuring economic growth.
 Other Measures
• The Gender Inequality Index (GII) provides insights into gender
disparities in health, empowerment and the labour market.
• Unlike the human development index (HDI), however, higher values in
the GII indicate worse achievements.
• Happy Life Expectancy Index seeks to measure the degree to which
people live long and happy lives.
• Gross National Happiness a measure of living standards which
includes a wide number of indicators including income, psychological
well being, education and ecological diversity.
 Reasons for differences in living standards and
income distribution within and between countries
• Difference in living Standards within a country: there can be variations in living
standards within a country.
• Regional variances in income and consumption.
• Major type of sectors/jobs: manufacturing and services heavy regions will have
higher incomes, education and health services compared to agricultural regions.
• Local government provisions of education and health.
• Difference in living Standards between countries:
• Productivity of industries: more productive industries yield more output and
incomes.
• Major industries: what makes countries like Qatar and Norway achieve some of the
world’s highest per capita incomes is that their income comes mostly from their
petroleum industries which produce and export a highly demanded scarce resource.
 Reasons for differences in living standards and
income distribution within and between countries
• Population: dense populations lower per capita income and put pressure on
scarce resource
• Ability of citizens pay taxes: higher tax-base and taxable incomes allow
governments to invest in infrastructure and welfare programmes.
• Provision of health and educational facilities.
• Variety of goods/services produced: if citizens can choose from a wide variety
of products, living standards rise. Western countries like the US enjoy this.
• War, crime and natural disasters: war-struck countries of Asia, the high crime
rates of Latin America and frequent natural disasters in island countries, drive
down their living standards as they damage infrastructure and put people in
hardship.
 Questions to think about and answer

1. Discuss whether a reduction in government spending on

education will reduce living standards. [8]

2. Analyse how subsidies given to farmers could raise living

standards. [6]
Discuss whether a reduction in government spending on education will reduce living
standards. [8]
Up to 5 marks for why it might:

• it may reduce the quality/availability of education (1) this could reduce the skills of
workers (1) lower their chances of getting a job (1) getting a well-paid job (1) reduce
income (1) reduce goods and services people can enjoy (1)
• it may reduce people’s access to knowledge about good nutrition/health care (1)
this could increase illness (1) lower life expectancy (1)
• a less skilled labour force (1) may discourage multinational companies setting up in
the country (1) this could reduce employment opportunities/reduce wages (1) reduce
incomes (1) reduce goods and services people can buy (1)
• a reduction in government spending e.g. education may reduce aggregate demand
(1)
lower aggregate demand may reduce output and incomes (1)
• it will reduce the country’s HDI value (1) which is an indicator of living standards
Up to 5 marks for why it might not:
• instead of spending money on education, the government might spend money on e.g.
health care (1) a healthier population can enjoy life more and live longer (1) a healthier
labour force may raise productivity (1) increase wages (1) increase the goods and services
people can buy (1) this could increase the HDI value (1)
• instead of spending money on education, the government might spend money on e.g.
infrastructure (1) better infrastructure can reduce firms’ costs of production (1) make
domestic firms more internationally competitive (1) encourage firms to expand (1) raise
employment (1) increase incomes (1) increase the goods and services people can buy (1)
• a country’s birth rate may be falling (1) so there may be fewer children in education (1)
the amount spent per child may still be rising (1) improving productivity (1) raising wages
increasing consumption (1)
• less may be spent but it might be spent more effectively (1) this will raise the quality of
education (1) raise productivity (1) raising employment (1) increasing consumption (1)
Analyse how subsidies given to farmers could raise living standards.
May increase supply (1) as extra payment received (1) higher supply will
reduce price (1) lower price will make food more affordable (1) food is a
basic necessity (1).
Reduced costs for farmers (1) increases their profits/income (1).
Subsidies for capital equipment e.g. tractors (1) improve productivity (1)
increasing farm outputs / incomes (1).
More/better quality food may make the poor healthier (1) increasing their
earning capacity (1).
The poor may be able to spend less on food (1) allowing them to buy
other basic necessities (1).
Note: reward increase in supply (1) lower price (1) if shown on a diagram.