Section nine

Factors that determine a Countrys Standard of Living

The standard of living is defined as the level of wealth experienced by a country. Standard of
living varies from person to person, family to family and nation to nation. It also varies over
time. The national standard of living means the average standard of living of all the persons
living in that country. Factors that determine a country's standard of living:

1. The level of consumption of goods and services

The greater the amount of goods and services consumed, the higher will be the standard of
living. The counter argument to this is that the quality of the goods and services may have
deteriorated while the level of consumption increased.
2. Average disposable income of the population
Disposable income refers to net income, the amount of money that is available to be used as one
would like to. Per capita Gross National Product (GNP) reveals the average amount of earnings
of each person in an economy. GNP is the value of output created a country's owned factors of
production located at home or abroad. Disposable income is either spent on consumption goods
and services or saved. As far as standard of living is concerned, the higher the average disposable
income of the population, the higher will be the standard of living. The counter argument here is
that the disposable income may be high, but if it is unequally distributed, many people may have
a low standard of living.
3. The level of national ownership of capital equipment
As a country increases its ownership of capital equipment, it is able to produce more goods and
services and, thereby, increase its standard of living. However, this means that they will first
have to save or reduce consumption in order to accumulate this capital. During this time, the
standard of living may actually fall.
4. Access to modern technology
Modern technology enables a country to produce more and to produce more efficiently, thereby,
increasing standard of living. However, for developing countries like Jamaica, the cost and
maintenance of modern technology is high which often results in loss of jobs. This, in turn,
means a lower standard of living.
5. The level of investment in research and technology
The more a country spends money in research and technology, the greater will be its
improvements in the level and quality of goods and services and then the greater will be the
standard of living. However, cost becomes a dominant factor as research and technology can be
very costly.

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 Indicators of a country's quality of life

Quality of life refers to the extent to which the country enjoys the benefits of its wealth. The
factors that affect this include:

The extent of security enjoyed- The greater the level of security enjoyed by the citizens,
the greater will be the quality of life. High levels of crime can prevent citizens from accessing
the wealth that will increase their quality of life.
The availability of health, educational and recreational facilities. Greater access to
these will surely increase the quality of life. Access, however, may be dependent on ability to
pay. Governments can increase a nations access to these areas by subsidising the cost, or by
providing them free of cost.

Diet and nutrition. The amount of food and drink is not the important thing as far as
quality of life is concerned. If people are not having balanced meals, then their diet and nutrition
will be poor and the quality of life will fall even if they are consuming more.

Life expectancy. This refers to the average number of years a person is expected to live.
If people are expected to live longer than before, it will mean that the quality of life has, in fact,
increased.

The rate of infant mortality. Infant mortality refers to death among infants. If a country
is experiencing reduced death rates among infants, then their quality of life would be said to have
increased. This could be because of improved research in health and improved health or greater
access to health care.

Access to public utilities. The greater the access to public utilities such as electricity and
portable water, the greater will be the quality of life. If only a few persons in a country have
access to these utilities then the quality of life will be very low.

Whereas the standard of living is measured by physical quantity, a countrys quality of life is
determined by the quality of goods and services enjoyed by citizens.

National Income
The national income or the national product is the total output of a country over a period of time,
for example a year, measured in terms of the money value of the total production of goods and
services.
Importance of recording the quantity of goods and services the country has produced over the
years:
1. To determine the state of the economy. The total flow of wealth (goods and services)
produced, distributed and consumed by the economy as a whole. Therefore a comparison can be

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done to determine the rate of economic growth form one year to another. National Income
figures can also be used to compare the economic position of different countries.
2. NI figures could give some indication of the standard of living of the people in the
country from year to year, and compare the people in other countries.
3. NI figures indicate the rate at which the nation's income is growing and so assist
government in planning the economy, businessman in planning future investment, and trade
union in determining whether to ask for wage increases.

Techniques used to measure NI

1. The factor- earnings or income approach-NI is measured based on the dollar earnings
of the factors of production.
2. The expenditure method- NI is measured based on the money spent on output produced
in a year. This simply means that demand for this output is measured by the expenditure on the
output in question. Individuals who demand the output of a country are consumers, firms,
government and people from abroad. Hence the demand for output is consumers' demand C+
investment goods I+ demand for goods and services by government G + exports X - imports M
(C+I+G+(X-M)=NE
3. The output approach- The value of the final output of all sectors is added up, making
the necessary adjustments to prevent double counting by adding in the final output of goods or
services.
4. Per Capita income- is an average figure which can be misleading.

Gross Domestic Product (GDP)

GDP is the total money value of all output produced within a country over a year. The word
domestic refers to income earned from local production only.

Gross National Product (GNP)

GNP is the total money value of all output produced over one year, both within a country and
from its overseas investments.
Therefore GNP = GDP + overseas earnings by nationals

Net National Product (NNP) or National Income (NI)

National Income (NI) = GNP- depreciation
Since GNP figures do not accurately measure the standard of living, the following indices may
be used.
Per capita GNP
This is calculated by dividing a countrys GNP by its total population. That is,
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For example if a countrys GNP is $40,000,000 and its total population is 5,000, its per capita
GNP would be $8,000.
40,000,000 = 8,000
5000
Thus each citizen enjoys on an average $8,000 worth of goods and services.
Per Capita income- is an average figure which can be misleading. Reasons why per capita
income is unreliable measure of standard of living:
1. Increases in the general price level occur from one year to another and in one country as
compared with another.
2. The quantity and quality of consumer goods and services and he actual amount of money
after taxes which they have to spend vary.
3. It does not take account of the conditions under which people work and travel to work
and the social services available to the people.
4. It fails to reflect the uneven distribution of income in a country and the level of noise,
water and air pollution.
5. It does not reflect the length of the working week or conditions of employment and
industrial relations
6. Vast sums of money expended on military resources impact very little on standard of
living.

Per capita income figures are inaccurate when used to compare standards of living between
countries because:
1. There is a need to have a common measure of NI, but countries have different exchange
rates expressed in the value of their own currency.
2. The distribution of income between countries is different making comparison difficult.
3. The extent of the underground or black economy varies from country to country.
4. Climates are different
5. Cultures are also different giving rise to a standard of living interpreted very much
according to the individual citizens cultural value system.

Factors affecting national output

1. Natural resources For example mineral deposits, climate, fertility of soil and fish in the
sea. How well these are utilised and developed could determine the standard of living of a
country.
2. The nature of the people especially the labour force.
3. The capital equipment available- the use of adequate capital equipment such as
machinery can greatly increase the material wealth of a country.
4. Factors of production
5. Foreign aid
6. Political stability

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The distinction between economic growth and development

The economic growth of a country of a country is determined by the growth of its national
income, or increases in the total output of goods and services, taking into account inflation and
changes in population. It refers to the real growth in or expansion in national output, and is most
often measured in terms of real Gross Domestic Product (GDP). The concept of economic
growth is positive. This means it always refers to an increase in output. Negative growth, refers
to a decrease in the national output. A country which has a rapid rate of growth will also enjoy a
rapidly rising standard of living, if the benefits of growth are allowed to reach domestic
consumers.

Advantages of economic growth

1. Improved standard of living
2. The rate of unemployment falls
3. Social and political stability
4. The rate of savings rises
5. Investment increases
6. There is increased provision of public and merit goods
7. Creates conditions for economic development

Disadvantages of economic growth

1. The rate of inflation may rise
2. Rise in import purchases may create a balance of payments deficit
3. Negative externalities for example pollution
4. Over-consumption
5. Rise in demand for demerit goods
6. Opportunity costs of using non-renewable resources
7. The gap between rich and poor widens if attempts at redistributing of income is not
successful

Economic development is qualitative and refers to the process by which the standard of living
and the well-being of the entire nation are improved by raising real per capita income. Economic
well-being is concerned with the quality of housing, clothing, education, food, health, peace of
mind, security, eradication of poverty and eradication of inequalities in income and wealth, and
so on. If any of these factors increases or improves, there will be economic development.
Human resource development looks at improving the human resources of labour and
entrepreneurship. Improvement of labour and the entrepreneur means that the productivity of
both will increase. In turn, there will likely be an increase in economic growth and development.
The human resource can be improved through education, training or retraining, improved health
facilities, improved working conditions and an improvement in the factors of production that
they have to work with.

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Factors affecting economic growth and development:
1. Rate of investment- A country must devote a large proportion of its national income to
its wealth-creating potential, or capital equipment, and in order to do this the rate of saving
within the country must increase.
2. The rate of increase of the working population
3. Technical training-the workforce should be well trained and educated.
4. The role of government-government fiscal (taxation) and monetary (credit) policy
should be geared towards stimulating and encouraging saving and additional private investment.
5. Government expenditure- public expenditure should be invested in fields which assist
future output.
6. Balance of payments-

Growth without development take place when there is growth without an increase in
employment. It is also known as jobless growth. For example, in T&T and Guyana in the 1990's
when modest growth of around 3% co-existed with an unemployment rate of 16-20%.

The role of education in economic growth and development

Improved education and training means that labour and entrepreneurship will now have greater
capacity to increase the national output and improve the well-being of the nation. Through
education and training, labourers may learn new and more efficient methods of production and,
thereby, increase the overall output. The entrepreneur might learn how to better organise and bear
risks, thereby, causing improved output and improved economic well-being. Education, thus,
improves the productivity and efficiency of both of the human factors.

International Trade
When countries buy goods and services from each other and/or sell goods and services to each
other, this is referred to as international trade. International trade is thus trade among countries.

Reasons for International Trade

1. Climate and soil type differences. Not all countries have the same climate and soil conditions.
Different crops will grow where the climate and soil types differ.
2. Natural resources. These can only be mined where they are found, for example, bauxite. Some
countries are rich in mineral resources; others have little or none at all.
3. Special skills of the labour force. The type of labour determines what is produced. For
example, France produces fashions (clothes), cologne and various types of cheese because the
labour force has special skills and aptitude in these areas.
4. Lack of quantity and quality of local goods. Very often, countries import goods and services
because what they produce locally is not enough for local needs and/or because the quality falls
short of what is desirable.
5. Increased transportation and communication. These have made trading on a worldwide
scale much easier.
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6. Access to a wider variety of goods and services. Wider variety pleases consumers and
results in an increase in their standard of living. The same is true for countries.
7. Foreign exchange. This is gained from exports and is used to pay for imports.
8. World output increases. This allows the problem of scarcity to be reduced
9. Cheaper goods and services. Countries may import goods and services because they are
cheaper than goods and services sold locally.

Benefits of international trade

1. Provides a greater range of products and services available to a country
2. Allows a country to develop export industries which provide employment
3. Provides a country with a mass market and can therefore lead to economies of scale and
low costs of production
4. encourages competition which enhances quality and lower prices
5. contributes to the spread of technology
6. leads to international specialisation which raises output worldwide and relieves the
problem of scarcity.

Problems of international trade

1. There are different currencies in each country or group of countries and a different rate of
exchange between countries.
2. Differences in language do not make trading simple.
3. Import restrictions, e.g quotas and embargoes, are a major barrier to trade.
4. Legal and technical regulations differ between countries,e.g most perishable products
must pass strict standards before they can enter a country.
5. Unfair competition, also called dumping can retard trade because some products which
are subsidised by government are sold in the Caribbean region at a lower price than obtain in the
home country.
6. Delays in payment are common
7. Long distances drive up transport costs
8. Changing customs and tastes cause difficulties in marketing.

Balance of Trade & Balance of Payment

A countries balance of payments account records all the flow of money between residents of that
country and the rest of the world. A countrys balance of payments thus shows the difference
between the receipt for goods and services exported and payments made for goods and services
imported and movements of capital in and out of the account. If at the end of the year a country
recorded more exports than imports then this is known as a surplus or favourable balance. The
two main parts of the balance of payments accounts are the current account, capital account
and official financing.

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1.The current account records payments for imports and exports of goods and services. The
balance of trade or visible balance records imports and exports of physical goods only. The
current balance includes both the balance of trade and net invisible trade balance. A negative
balance is a deficit balance and a positive balance is a surplus balance.

Visible exports and imports are goods that we can see or touch.
Invisible exports and imports are mainly services such as tourism, insurance services, transport,
interest, profits and dividends received or paid, gifts from relatives and government expenditure.

Balance of Trade/Visible balance = Export ($) Imports ($)

Invisible balance = Net transportation +net interest & profits + net government
Net figures are arrived at by subtracting payment from the receipt for each service. For example,
subtracting the out flow of money spent by locals on trips overseas from payments received from
visiting tourist, will give a net figure for tourism.
Current Balance = visible balance + invisible balance

2.The capital account

The capital account or financial account shows the flows of capital between countries i.e. Flows
of capital into a country and flows of capital leaving a country. This account records inflows and
outflows based on short-term investment, medium-term investment and long-term
investment.(purchase of shares, buying and selling of factories)

3. Official financing
The official financing records how a deficit or surplus was financed.

The Balance of Payments Accounts must balance

The sum of the current account and the capital account must be zero. A firms balance sheet
shows its financial position after one year of trading. The balance of payment similarly shows the
countries financial position on a yearly basis. Similar to a firms balance sheet the balance of
payments account must balance, since a debit or a credit balance must be covered in some way.
Credit items are- Inflows /receipts
Debit items are- outflows /payments

The Balance of Trade/Merchandise balance/visible balance

The balance of trade records transactions in visible exports and visible imports and reflects
whether or not a country is earning enough to spend or spending beyond its means.

Balance of Payment Problems

If a country continues to experience deficits in its visible and or invisible balances it will affect
its level economic activity. Deficits mean there is not enough money to purchase the goods and
services required by citizens.

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Methods of Correcting Balance of Payment Problems
1. Tariffs (taxes on imports)
Taxes increase the cost of items imported and therefore will discourage imports. This may
encourage the purchase of cheaper local imports.
2. Import licences
Only holders of this licence can import particular goods and services. Government can restrict
the importation of certain goods and services e.g. those that compete with local goods.
3. Quotas
Restrictions on the quantity of a type of commodity to be imported.
4. Total ban of certain commodities.
5. Exchange Control
This is various forms of control by government on the purchase and sale of foreign currencies by
citizens and foreigners. Example: limiting the amount of foreign exchange that residents can
leave the country with, banning the use of foreign currencies locally and having a fixed exchange
rate.
6. Encouraging export
Incentives given to exporters.
7. Devaluation the price of foreign currency is increased against the local currency thus
discouraging its purchase.
8. Special Drawing Rights -Drawing on the resources of the International monetary fund
9. Importing on credit Purchasing on credit delays payments in the short term
10. Accepting gifts from other countries This reduces the need to spend foreign exchange.
11. Borrowing from other countries This represents inflows into the Balance of payments
accounts