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Unlock This CourseIs a person in one country better off than a person in another? To answer that, economists need a number. Living standards describe how well off people in a country are: how much they can buy, how healthy they are and how much education they receive.
Key terms:
Living standards cannot be measured with a ruler, so economists use indicators. This lesson covers the two the syllabus names: real GDP per head and the Human Development Index.
Remember from the lesson on economic growth that real GDP is the value of a country's output, adjusted for price changes. Real GDP alone can mislead. A big country has a big GDP just because it has many people. Real GDP per head fixes this by sharing real GDP out across the population.
Key terms:
Real GDP per head = real GDP ÷ population
Delmara has a real GDP of $240 billion and a population of 8 million.
Real GDP per head = $240,000 million ÷ 8 million = $30,000.
A higher real GDP per head usually suggests that people have more goods and services available to them, so living standards are higher.
Tarsonia has a real GDP of $90 billion and 30 million people. Real GDP per head is $90,000 million ÷ 30 million = $3,000.
Next year real GDP rises 5% to $94.5 billion, but the population also rises 5% to 31.5 million. Real GDP per head is $94,500 million ÷ 31.5 million = $3,000.
Output grew, but real GDP per head did not change. The average person is no better off.
Money is not the only thing that matters. A country can have high incomes but poor health care. The Human Development Index (HDI) combines three components into one number between 0 and 1. The closer to 1, the higher the level of human development.
Key terms:
Measured by life expectancy at birth. Longer lives suggest better health care, food and clean water.
Measured by mean years of schooling and expected years of schooling together.
Measured by GNI per head, the average income for each person.
HDI gives one number, so countries can be ranked and compared. A country with high income but short lives and little schooling will score lower than its income alone would suggest.
Country X has an average income of $40,000 per head, but people live to 68 and children expect 9 years of schooling. Country Y has an average income of $25,000 per head, but people live to 82 and children expect 15 years of schooling.
Country X looks better on income alone. Country Y is stronger on two of the three HDI components, so its HDI could be higher.
Advantages:
Disadvantages:
Advantages:
Disadvantages:
Neither indicator is perfect. HDI is wider, but it is not complete. Using both together gives a better picture than either one alone.
Students write that GDP per head is the same as income for each person. It is output for each person, and real GDP is adjusted for prices. Another slip is saying HDI measures happiness. It only covers life expectancy, education and income. Finally, do not say that a rise in real GDP always means a rise in real GDP per head. The population matters too.
Calvoria has a real GDP of $150 billion and a population of 25 million. A newspaper says that Calvoria's living standards should be judged by real GDP per head alone.
(a) Calculate Calvoria's real GDP per head. [2 marks]
(b) State the three components of the Human Development Index. [3 marks]
(c) Explain one disadvantage of using real GDP per head as an indicator of living standards. [3 marks]
(d) Discuss whether HDI is a better indicator of living standards than real GDP per head. [6 marks]
(a) Real GDP per head = $150,000 million ÷ 25 million (1) = $6,000 (1).
(b) Life expectancy at birth (1), education (mean and expected years of schooling) (1), income (GNI per head) (1).
(c) Real GDP per head is an average (1), so it hides inequality, because a few rich people could raise the average while most people stay poor (1). This means the figure may not show the living standards of ordinary people (1).
(d) HDI is better because it includes health and education as well as income (1), so it gives a wider view of living standards (1). Real GDP per head only measures output, and a country can have high output but poor health care (1). However, HDI is still an average, so it hides inequality (1), and it leaves out things such as the environment (1). Real GDP per head is simpler and easier to calculate (1). Overall, HDI is generally better because it covers more of what makes people well off, but neither is perfect (1).
In a 6-mark Discuss question, give points for HDI and points against it, then finish with a clear conclusion. Show your working in the calculation: the division itself earns a mark.