Living Standards

UNIT 32
 Real GDP per head as a measure of Standard
of Living
• It is not necessary that an increase in GDP per head
might show increase in standard of living.
1. Real GDP is an average. Not every one may benefit
from a rise in the average income level. Income
might be unevenly spread.
2. Higher output means more goods and services
produced. But this does not necessarily mean
increase in standard of living. E.g. increase in
consumption of tobacco, increase in police
services.
 Real GDP per head as a measure of Standard
of Living
3. Real GDP per head may understate the products
available to people due to informal economic
activity.
4. Living standards are also influenced by other
non- material factors such as working
conditions, number of working hours, pollution,
etc.
 Comparing Living Standards between
countries
1. Real GDP per head causes problems while
comparing living standards as there may be
differences in
– distribution of income
– Size of informal economy
– Working hours and conditions
– Composition and quality of output
– Environmental conditions
 Comparing Living Standards between
countries
2. Countries measure their Real GDP per head
in their own currency. This causes a problem
for comparison between countries.
Hence economists use Purchase Power Parity
exchange rates when comparing countries’
GDP.
These compare GDP using an exchange rate
based on the buying power of currencies in
their own currencies.
Composite indicators
 Human Development Index (HDI)
• Human Development Indicator (HDI)- It is a wider measure for
living standards which takes into account the income, education
and the average life expectancy. United Nations Development
Program (UNDP) publishes HDI every year.
• First, it considers length of time for which people can enjoy life,
measured as life expectancy at birth.
• Second, it considers adult literacy (wt 2/3) and the combined
ratios primary, secondary and tertiary enrolment ratios (wt 1/3).
 HDI
• It does not take into consideration –
– Political freedom and environment.
– Differences in life expectancy.
– Education and differences in income between
males and females.
– Education and differences in income between
rural and urban population.
Dimensions and indicators of hdi

https://hdr.undp.org/data-center/human-development-index#/indicies/HDI
Countries with very high HDI

https://hdr.undp.org/sites/default/files/data/2020/2020_Statistical_Annex_Table_1.
Countries with high HDI

https://hdr.undp.org/sites/default/files/data/2020/2020_Statistical_Annex_Table_1.xl
Countries with medium HDI

https://hdr.undp.org/sites/default/files/data/2020/2020_Statistical_Annex_Table_1.x
Countries with low HDI

https://hdr.undp.org/sites/default/files/data/2020/2020_Statistical_Annex_Table_1.xls
Other countries and territories HDI

https://hdr.undp.org/sites/default/files/data/2020/2020_Statistical_Annex_Table_1.xls
 Genuine Progress Indicator (GPI)
• Genuine Progress Indicator (GPI)– A measure of living standards
which takes into account a variety of indicators including income,
leisure time, distribution of income and environmental standards.
• First, GDP Corrected against income distribution (poor receives
more benefit from the rise in income than the rich)
• Deductions made, of those which reduce the living standards (Eg.
Traffic accidents, carbon emissions, cost of crime etc.)
• Additions made of those which make positive contributions (Eg.
Value of house work, volunteer work etc.)
 Other measures - GII
• Gender Inequality Index (GII) – It considers
gender based disadvantages
– Reproductive health (maternal mortality)
– Empowerment (percentage of seats in national
parliament held by women and relative % of men and
women with secondary education)
– Labour ( women’s participation in labour force)
 Other measures - HLEI
• Happy Life Expectancy Index (HLEI) – It is based
on degree to which people live long and healthy
lives
= Life expectancy at birth X Average life expectancy
Comparing living standards
and
income distribution
 Measures of income and wealth inequality
• Income is unevenly distributed between households in
every country, but to different extents.
• Wealth is the stock of assets which have a financial
value. It is more unevenly distributed among the masses
• To assess the distribution of income and wealth in a
country, calculate the percentages of income earned
and wealth owned by given proportions of the
population.
• Two common proportions used are deciles (tenths) and
quintiles (fifths).
 Why differences in living standards and
income and wealth inequality
• Income may be unevenly distributed between
households within and between countries due
to uneven holdings of wealth, differences in
the composition of households and differences
in the opportunity and ability to earn an income.
• Households with a number of workers are likely
to have a higher income than those with one or
no workers and a high number of dependants.
• High skilled workers with better qualifications
are likely to be in high demand and hence are
likely to receive high wages.
• Full-time workers usually earn more than part-
time workers