Section 5 notes – Economic development:
32. Living standards
33. Poverty
34. Population
35. Differences in economic development between countries
32. Living standards
- Sustained economic growth is an important macroeconomic objective
because it is the most practical measure of the standard of living in a
country
- Standard of living = the social and economic wellbeing of individuals
in a country at a particular point in time
- Two main measures/indicators of standard of living are GDP per capita
(per person) and the human development index
- Real GDP is a good single measure of the standard of living (we all
know it’s not)
o Higher real GDP means people have more to spend on goods and
services
o Easy to calculate
- But with real GDP to measure the standards of living, the size of the
population is ignored
o Making GDP per capita a better measure
- Another issue is inflation, since it erodes the value of GDP
- So, the best measure of the standard of living derived from GDP is real
GDP per capita
o Adjusted to price changes
o Reflects the size of the population
- Human development index (HDI) = UN composite indicator of living
standards in a country, comprising 3 dimensions of human
development: education, healthcare and income
o Healthcare measures life expectancy at birth
the better the healthcare, the greater its social and economic
wellbeing tends to be
o Education measures the mean years of schooling and the
expected years of schooling in the country
the higher the average years of schooling, the greater the degree
of human development
o Income levels – the higher the national income (or GDP) of a
country, the greater human development tends to be
- HDI is better than GDP because it is a composite index = considers
several key indicators of living
- Social improvements in the country are also more likely to increase
standards of living than just increase in GDP
, - Limitations of HDI:
o Qualitative factors – ignores qualitative factors affecting living
standards (like gender inequalities and human rights)
o Income distribution – doesn’t take account of the inequitable
distribution of income in the economy and lacks accuracy as an
of living for an “average person”
o Environmental issues – ignores environmental and resource
depletion resulting from economic growth
o Cultural differences – ignores cultural variations and different
interpretations of the meaning of standards of living
- Factors that cause differences in living standards include, but are not
limited to:
o Productivity levels – differences in productivity levels cause
differences in wages and earnings
Highly skilled and experienced workers earn higher salaries, so
will tend to enjoy a higher standard of living
o Role of government – government can use direct taxes to
redistribute income in the economy
A fairer redistribution of income and wealth can help to raise
living standards for the majority of a population
o Size of the population – size and demographics of a population
have direct impact on living standards
Densely populated cities tend to have higher rents due to limited
space and high demand, as well as congestion, pollution and
higher living costs
o Distribution of national income – although national income may
be high, it may not be distributed in a socially desirable way
Composition of GDP is important to consider:
If it increases because of higher government spending on
the military, this does not translate to better living
standards for the majority of the population
o Regional differences – there are regional income and wealth
disparities within countries, whether is it due to natural reasons,
main industry or composition of the population (e.g., average
salary in capital is higher than in rural areas)
o General price level – inflation increases the cost of living, so an
increase in the general price level tends to have a negative
impact on standards of living
o Level of education – there is a positive correlation between
educational attainment and earning
The more educated and well qualified a person is, the higher
their earning potential tends to be = has direct impact on the
standard of living
o Level of freedom – various measures of living standards include
consideration of civil liberties, political rights, religious freedom
and economic rights
32. Living standards
33. Poverty
34. Population
35. Differences in economic development between countries
32. Living standards
- Sustained economic growth is an important macroeconomic objective
because it is the most practical measure of the standard of living in a
country
- Standard of living = the social and economic wellbeing of individuals
in a country at a particular point in time
- Two main measures/indicators of standard of living are GDP per capita
(per person) and the human development index
- Real GDP is a good single measure of the standard of living (we all
know it’s not)
o Higher real GDP means people have more to spend on goods and
services
o Easy to calculate
- But with real GDP to measure the standards of living, the size of the
population is ignored
o Making GDP per capita a better measure
- Another issue is inflation, since it erodes the value of GDP
- So, the best measure of the standard of living derived from GDP is real
GDP per capita
o Adjusted to price changes
o Reflects the size of the population
- Human development index (HDI) = UN composite indicator of living
standards in a country, comprising 3 dimensions of human
development: education, healthcare and income
o Healthcare measures life expectancy at birth
the better the healthcare, the greater its social and economic
wellbeing tends to be
o Education measures the mean years of schooling and the
expected years of schooling in the country
the higher the average years of schooling, the greater the degree
of human development
o Income levels – the higher the national income (or GDP) of a
country, the greater human development tends to be
- HDI is better than GDP because it is a composite index = considers
several key indicators of living
- Social improvements in the country are also more likely to increase
standards of living than just increase in GDP
, - Limitations of HDI:
o Qualitative factors – ignores qualitative factors affecting living
standards (like gender inequalities and human rights)
o Income distribution – doesn’t take account of the inequitable
distribution of income in the economy and lacks accuracy as an
of living for an “average person”
o Environmental issues – ignores environmental and resource
depletion resulting from economic growth
o Cultural differences – ignores cultural variations and different
interpretations of the meaning of standards of living
- Factors that cause differences in living standards include, but are not
limited to:
o Productivity levels – differences in productivity levels cause
differences in wages and earnings
Highly skilled and experienced workers earn higher salaries, so
will tend to enjoy a higher standard of living
o Role of government – government can use direct taxes to
redistribute income in the economy
A fairer redistribution of income and wealth can help to raise
living standards for the majority of a population
o Size of the population – size and demographics of a population
have direct impact on living standards
Densely populated cities tend to have higher rents due to limited
space and high demand, as well as congestion, pollution and
higher living costs
o Distribution of national income – although national income may
be high, it may not be distributed in a socially desirable way
Composition of GDP is important to consider:
If it increases because of higher government spending on
the military, this does not translate to better living
standards for the majority of the population
o Regional differences – there are regional income and wealth
disparities within countries, whether is it due to natural reasons,
main industry or composition of the population (e.g., average
salary in capital is higher than in rural areas)
o General price level – inflation increases the cost of living, so an
increase in the general price level tends to have a negative
impact on standards of living
o Level of education – there is a positive correlation between
educational attainment and earning
The more educated and well qualified a person is, the higher
their earning potential tends to be = has direct impact on the
standard of living
o Level of freedom – various measures of living standards include
consideration of civil liberties, political rights, religious freedom
and economic rights
