Measuring Living Standards

An economist is concerned with measuring and explaining living standards. However, when we look closer at measuring living standards we see it is not straight forward and there are many different approaches that we can take. The most common measure of living standards is real GDP per Capita

GDP per Capita – GDP measures National Output / National Income. Per capita is the average income per person in the economy. This is a rough guide to living standards but as these essays show GDP has many limitations in measuring living standards

• Does GDP measure Economic Development?
• Does Economic Growth Increase Happiness?

GDP – Purchasing Power Parity PPP

Another important factor in measuring living standards is GDP measured at Purchasing power parity. This means that the statistics take into account the actual cost of living. For example, some countries may have lower GDP, but the cost of living is much cheaper. PPP adjusts for these different costs of living.

Poverty and Living Standards

An important factor in measuring living standards for the economy is the number of people living below the poverty line.

The poverty line is defined as:

The level of expenditure necessary to buy a minimum level of nutrition and other basic necessities. The World Bank say that the poverty line can vary somewhat from country to country, reflecting different costs of living for taking part in the everyday life of society.

Index of Human Development HDI

This is a measure which seeks to look at the available choices that people have. It is a composite indicator comprised of 3 basic facotrs

1. Real GDP per Capita, adjusted for the local cost of living (PPP)
2. Life expectancy
3. Education – levels of literacy

High Human development is given a value of 1. Low levels of Human development are give a value close to 0.

In 1997, the country with the highest levels of HDI was Canada with 0.932

The poorest country was Sierra Leone with an   HDI of 0.254

Index of Human Poverty HPI

This was introduced by the United Nations Development Programme UNDP

It is similar to the Index of Human Development, but, the HPI gives a greater weighting to examining how economic development is distributed throughout society.