c4 - living standards

imitations/drawbacks 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 civilisation has been disrupted

benefits of using HDI to measure living standards

- it takes into account some major indicators of living standards - recognises that it is not just output or income that determines living standards, but also social factors - 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 its produced by the UN and is thus also widely used and recognised

healthcare index/health dimension

measured by average life expectancy at birth

what is the most common measure of economic development

Human Development Index (HDI)

why is measuring income not a good indicator of economic development

a country can have high income without being developed. if the income is earned by relatively few, the quality of life is poor and most people are not politically free

suggest one way a government may try to improve the country's standard of living

a government will want to increase economic growth. it may do this through supply-side policies to increase the amount that the economy can produce, e.g. invest in infrastructure, encourage innovation and provide more incentive to work.

what is the HDI

a summary measure of average achievement in a number of important dimensions, such as health, education and standard of living. it was made to show the view that people and their capabilities are a better measure of the development of a country rather than economic growth alone used by the United Nations to compare living standards across the globe, the HDI combines different measures into one to give a HDI value from 0 (lowest) to 1(highest). These are: income index, education index, healthcare index

living standards

all the factors that contribute to a person's well-being and happiness

income distribution

how the nation's total income is distributed among its population the way the national income is divided into "shares" ranging from the poor to the rich.

standard of living index

measured by gross national income (GNI) per capita

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 now be expected to spend in education in his entire life (expected years of schooling) - measured by the mean years of schooling for adults aged 15 and above and expected years of schooling for children

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)

define real GDP per capita

real GDP is the value of gross national income (GNI) after it has been adjusted to take account of inflation e.g. if income increases by 3% but prices increase by 3% too, real GDP stays the same if income increases by 5% and prices increase by 3%, real GDP increases only by 2%

how is real GDP per capita calculated?

real GDP per capita = real GDP/population

how is the standard of living in a country measured?

real GDP per head

factors that affect living standards between countries

- size of national income - population size

advantages 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 - takes population into consideration, adding emphasis on the goods and services available to individuals - since it is calculated on output, is a good indicator of the jobs being created - GDP data is readily available so is population data

problems of using real income per capita to measure standards of living

- doesn't take into account accumulated wealth and assets - doesn't take into account the quality of goods and services (over time the price of products may fall so incomes may fall even though quality may be increasing) - doesn't take into account quality of life (e.g. how many hours were worked for the income) - doesn't take into account income distribution (could be major income inequality within the economy) - doesn't account for unpaid work and trade (e.g. improvements made by the owners to their homes aren't counted, but improvements made by paid tradespeople are. doesn't include anything traded through barter because it hasn't been sold for a price - doesn't account for undeclared activity (shadow economy) - in some countries there's a significant amount of buying and selling that goes unreported to avoid taxes

reasons for differences in living standards and income distribution within and between countries

- 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 - 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 petroleum industries that are scarce and highly demanded internationally - population: dense population 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 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 into hardship

disadvantages of using GDP per capita to measure living standards

- 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 - 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 couldn't benefit from all the technology available today - distribution of income is very unequal in reality, so the GDP per head isn't accurate. 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 for charities and 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 or pornographic materials, it might show in the records as a rise in GDP per head but might not actually make people better off. Similarly, GDP might rise if the government has to rebuild after a natural disaster, which doesn't mean living standards have risen - the official GDP figures can be overstated due to technical errors or by political manipulation to look good, and give a wrong picture of living standards - this measure doesn't consider leisure activities, health and education levels, environmental quality- all that determines people's happiness and well-being - comparing GDP per head can also be unreliable as GDP accounting methods can be different for different countries.

factors that determine income distribution

- the tax system and how progressive or regressive it is - the benefits system - how many people are of working age relative to those not working

HDI values from 0-1

1 - total developed 0.8 and above - highly developed 0.5-0.8 - medium developed less than 0.5 - low level development

what causes differences in incomes between countries?

1) productivity of workforce - depends on skills and training and quality and quantity it has to work with 2) size and structure of population 3) quality of education sector 4) amount of investment in capital 5) quality of healthcare system - if workforce is healthier, it may be more productive 6) access to export markets and the ability to trade abroad 7) size of primary, secondary and tertiary sectors - the secondary sector tends to become more productive with investment than the primary sector

what is the difference between the standard of living and the cost of living?

standard of living =

define GDP per head/capita

the average income per person in an economy

comparing living standards and income distribution

the income per person will depend on what the overall income of the economy is and how many people there are. over time, it'll depend on growth rates of both. e.g. if population is growing at 7% a year, the national income needs to grow at a similar rate for the income per person to stay constant