Unit 5 - Economic development
Living standards
Indicators of living standards
Real GDP per head- can also be used to measure living standards, but it needs to be
● divided by the total population, into per head/capita
● adjusted for inflation to get real GDP per head.
If GDP is increased, then it would suggest that living standards has increased as more goods are shared
by people in the country
Criticisms of using GDP as an indicator
❏ Doesn’t consider inequality or political freedom within society. Therefore can’t indicate quality
of life.
❏ GDP only takes into account the value of goods produced, not the harmful effects of production
❏ GDP isn’t a great comparison between countries because of currency and exchange rate. GDP is
usually calculated in a country's own currency. Value of currency might change over time
❏ Doesn’t represent all economic activity, as it doesn’t acknowledge the presence of
underground/hidden/informal economic activity
❏ Not all goods and services will go through the market (they are free)
❏ It is hard to measure the cost of certain items of government spending (ex: defence)
❏ Real GDP doesn’t consider the quality of the product
❏ Literacy level in the country may be low, making it difficult to obtain accurate data
Human Development Index (HDI)- broader indicator of living standards. There are three elements to it:
❏ Standard of living measured by gross national income (GNI) per head of purchasing power
parity. This takes into account what money can buy in various countries
❏ Health is measured by Life expectancy at birth
❏ Education (measure by mean years of schooling and expected years of schooling)
Advantages and Disadvantages and features of the HDI:
HDI is used because it focuses on three elements, whereas GDP per head focuses only on output. Here
are some criticisms:
❏ Fails to take into account the impact of economic growth on the environment
❏ Has a narrow range of indicators.
❏ Other components might be better at measuring the three elements (ex: infant mortality might
be better at indicating health than life expectancy)
, Other indicators of living standards:
● HPI is the human poverty index, taking into account people below the poverty line.
● Inequality-adjusted human development index: a version of HDI that takes into account the
extent of inequality in a country
Comparing living standards and income distribution
a. Within countries
There are different standards of living within the same country:
❏ The unevenness of the in come distribution, where some people might have inherited wealth/
income
❏ Due to the type of work they do, some people earn a higher income than others, especially
those of skilled workers. May have a higher concentration of skilled workers in certain parts of
the country.
❏ Business owners or shareholders are likely to receive money
❏ There may be more jobs in certain parts of the country, such as the capital city, which may
enable some people to make more than others purely based on where they live.
b. Between countries
Standard of living may be different between countries for different reasons”
❏ The economic successfulness of a country's production activity, GDP may be compared. Also,
level of productivity
❏ Quality of health care and education may indicate the standard of living.
❏ How much the country invests in the capital, may lead to them using more advanced technology
❏ Infrastructure: transportation and communication
❏ Their abundance of natural resources (example: fossil fuels)
Poverty
Absolute and relative poverty
❏ Absolute poverty: this is a situation where people are defined as poor by a particular standard,
which could be lack of basic human needs (water, food and shelter) or how much money they
live off of per day (extreme poverty is less than 1.90$ per day according to world bank)
❏ Relative poverty: T his involves the comparison between the rich and poor, which means this
relates to the existence of economic poverty. You measure relative poverty in the ‘percentage
of average income’. For example, this person lives off 20% of the average income.
Causes of poverty:
Unemployment People who are unable to have regular employment might be in poverty
Living standards
Indicators of living standards
Real GDP per head- can also be used to measure living standards, but it needs to be
● divided by the total population, into per head/capita
● adjusted for inflation to get real GDP per head.
If GDP is increased, then it would suggest that living standards has increased as more goods are shared
by people in the country
Criticisms of using GDP as an indicator
❏ Doesn’t consider inequality or political freedom within society. Therefore can’t indicate quality
of life.
❏ GDP only takes into account the value of goods produced, not the harmful effects of production
❏ GDP isn’t a great comparison between countries because of currency and exchange rate. GDP is
usually calculated in a country's own currency. Value of currency might change over time
❏ Doesn’t represent all economic activity, as it doesn’t acknowledge the presence of
underground/hidden/informal economic activity
❏ Not all goods and services will go through the market (they are free)
❏ It is hard to measure the cost of certain items of government spending (ex: defence)
❏ Real GDP doesn’t consider the quality of the product
❏ Literacy level in the country may be low, making it difficult to obtain accurate data
Human Development Index (HDI)- broader indicator of living standards. There are three elements to it:
❏ Standard of living measured by gross national income (GNI) per head of purchasing power
parity. This takes into account what money can buy in various countries
❏ Health is measured by Life expectancy at birth
❏ Education (measure by mean years of schooling and expected years of schooling)
Advantages and Disadvantages and features of the HDI:
HDI is used because it focuses on three elements, whereas GDP per head focuses only on output. Here
are some criticisms:
❏ Fails to take into account the impact of economic growth on the environment
❏ Has a narrow range of indicators.
❏ Other components might be better at measuring the three elements (ex: infant mortality might
be better at indicating health than life expectancy)
, Other indicators of living standards:
● HPI is the human poverty index, taking into account people below the poverty line.
● Inequality-adjusted human development index: a version of HDI that takes into account the
extent of inequality in a country
Comparing living standards and income distribution
a. Within countries
There are different standards of living within the same country:
❏ The unevenness of the in come distribution, where some people might have inherited wealth/
income
❏ Due to the type of work they do, some people earn a higher income than others, especially
those of skilled workers. May have a higher concentration of skilled workers in certain parts of
the country.
❏ Business owners or shareholders are likely to receive money
❏ There may be more jobs in certain parts of the country, such as the capital city, which may
enable some people to make more than others purely based on where they live.
b. Between countries
Standard of living may be different between countries for different reasons”
❏ The economic successfulness of a country's production activity, GDP may be compared. Also,
level of productivity
❏ Quality of health care and education may indicate the standard of living.
❏ How much the country invests in the capital, may lead to them using more advanced technology
❏ Infrastructure: transportation and communication
❏ Their abundance of natural resources (example: fossil fuels)
Poverty
Absolute and relative poverty
❏ Absolute poverty: this is a situation where people are defined as poor by a particular standard,
which could be lack of basic human needs (water, food and shelter) or how much money they
live off of per day (extreme poverty is less than 1.90$ per day according to world bank)
❏ Relative poverty: T his involves the comparison between the rich and poor, which means this
relates to the existence of economic poverty. You measure relative poverty in the ‘percentage
of average income’. For example, this person lives off 20% of the average income.
Causes of poverty:
Unemployment People who are unable to have regular employment might be in poverty
