Living standards and differences in economic development

Last time

Before we start: last time, in Macroeconomic aims, the government budget and taxation, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

How well do people live?

Why do people in some countries live to eighty, while in others many children never reach school age? Living standards measure how well off people are. In this lesson: how to measure them, and why countries develop at such different speeds.

What living standards mean

Material living standards are about income and the goods and services people can buy: food, housing, transport. Non-material living standards are about quality of life: health, education, freedom, a clean environment and leisure time. A good measure should capture both.

Real GDP per head

Real GDP per head is real GDP divided by the population. It is the average output, and so income, per person. A country with a GDP of 300 billion dollars and 200 million people has a GDP per head of 1,500 dollars. It is easy to calculate and compare, and it is adjusted for inflation.

Limits of GDP per head

It is an average, so it hides inequality: a few very rich people can raise it while most stay poor. It misses the informal economy, unpaid work at home, and the quality of goods. And it ignores non-material things: pollution, working hours, health and freedom.

The Human Development Index

The Human Development Index, or HDI, combines three things: health, education and income. Health is measured by life expectancy at birth. Education by the mean years of schooling of adults and the expected years for children. Income by gross national income per head. Its value lies between 0 and 1. The closer to 1, the higher the level of human development.

GDP per head or HDI?

The two measures compared. HDI is wider, but it still leaves things out.

How investment raises the HDI

Investment in schools and teacher training raises years of schooling, the education part of the HDI. Investment in hospitals, clean water and sanitation raises life expectancy, the health part. Investment in capital goods raises productivity and output, so income per head rises, the income part.

Developed and developing

Developed countries have high incomes per head, high productivity, and most workers in the tertiary sector. Developing countries have lower incomes, more workers in the primary sector, such as farming, and often a fast-growing, young population. They often have lower life expectancy, lower literacy, and less infrastructure.

Signs of development

Here are the indicators examiners use to compare countries.

Why countries differ

Low productivity: less capital, less technology, and workers with less education and poorer health. Low saving and investment, because incomes are low, and a reliance on primary products whose prices go up and down. Fast population growth, weak institutions and corruption, debt, and conflict can all hold development back.

Does a bigger tertiary sector mean development?

It may: tertiary jobs, such as banking, IT and health care, are often higher paid, so incomes and living standards rise. But not always: many tertiary jobs, such as street selling, are low-paid and informal, and the gains may go to a few. So it depends on the type of service jobs, and on skills and education.

Mistakes that lose marks

Mistake one: saying economic development just means more output. It means higher living standards, including health and education. Mistake two: listing the three parts of the HDI without saying how each is measured. Mistake three: using GDP, not GDP per head, to compare countries of different sizes. The fix: per head, the three HDI parts, and both material and non-material.

The full-marks tip

The full-marks tip: compare countries with real GDP per head and the HDI, and say what each misses. For development, cover income and quality of life together.

On one card

So, on one card: living standards and development. Keep it for revision.