Indicators of Living Standards (Cambridge (CIE) O Level Economics)

Real GDP Per Capita

• Economic development is the sustainable increase in living standards for a country, typically characterised by increases in life span, education levels, and income 

• There are many measures of living standards

  • Single indicators e.g. real gross domestic product/capita, number of doctors/1000 people; infant mortality rate; % of the population with access to clean drinking water

  • Composite indicators such as the Human Development Index (HDI) 

The distinction between real, nominal and per capita GDP-

• In economics, the use of the word nominal refers to the fact that the metric has not been adjusted for inflation

• Nominal GDP is the actual value of all goods/services produced in an economy in a one-year period

  • There has been no adjustment to the amount based on the increase in general price levels (inflation)

• Real GDP is the value of all goods/services produced in an economy in a one-year period - and adjusted for inflation

  • For example, if nominal GDP is $100bn and inflation is 10% then real GDP is $90bn

• Real GDP per capita = rGDP / the population

  • It shows the mean wealth of each citizen in a country

  • This makes it easier to compare standards of living between countries: 

    • For example, Switzerland has a much higher GDP/capita than Burundi

•  It is useful to know the rGDP/capita, however it has the following disadvantages

  • It is a single indicator so provides very limited information

  • It is an average so there may be significant poverty in many parts of a country that has a high rGDP/capita

The Human Development Index (HDI)

• Developed by the United Nations, it is a combination of 3 indicators

1. Health, as measured by the life expectancy at birth e.g.in 2019 it was 81.2 years in the UK

2. Education, as measured by a combination of the mean years of schooling that 25 year olds have received, together with the expected years of schooling for a pre-school child

3. Income, as measured by the real GDP

• Each indicator is given equal weighting in the index

• The index ranks countries on a score between 0 and 1

  • The closer to 1, the higher the level of economic development and the better the standard of living

  • A value of < 0.550 is considered low development. E.g. Chad 0.394

  • A value of 0.550-0.699 is considered medium development. E.g. El Salvador 0.673

  • A value of 0.700-0.799 is considered high development. E.g. Thailand 0.777

  • A value ≥ 0.800 is considered very high development. E.g. Norway 0.957

An Evaluation of HDI

1. It is a composite indicator and includes several important indicators of living standards

2. It includes rGDP/capita which is an average - so the HDI still does not take into account inequality in the distribution of income

3. It does not measure environmental damage or resource depletion

4. It does not take into account cultural differences or measure qualitative factors such as happiness or equal rights