Measurement of Living Standards

GDP per capita is commonly used as an indicator of a country's living standards. Gross Domestic Product is defined as output produced by resources within the U.K. Other measurements of living standards also exist such as:

HDI (Human Development Index)

ISEW (Index for Sustainable Economic Welfare)

Misery Index

Difficulties in using GDP to measure living standards

1) Figures take no account of the distribution of income

A country's income may be concentrated in the hands of a small section of society. This tends to be the case in oil rich countries.

2) Figures understate national income

They do not include black market activity. Such unrecorded activity would boost figures if recorded. They do not include the value of non-traded output. E.g. households do their own washing and cleaning, rather than paying someone else to do it.

3) Figure over-state national income

What is in effect a welfare loss may be shown as an increase in national income. E.g. The efforts of the workforce to produce higher ouput may result in illness and loss of leisure time. These are a welfare loss but appear as a welfare gain due to higher national output.

4) Choice of exchange rate for making conversion to a common currency crucially affects the outcome

Converting the UK GDP per capita at £1 = $1.80 instead of £1 = $1.50 would give a 20% higher per capita income in dollars.

5) Lack of International Uniformity

There are differences in the degree of statistical sophistication in the collection of data between developed and developing countries. This results in a lack of international uniformity in methods of classifying the national account and therefore less accurate statistics.

Objectives of Economic Development

Economist Michael Todaro has identified three objectives of economic development.

1) Increase availability and distribution of basic goods
2) Increase standards of living
3) Expand range of economic and social choices


Developed by Pakistani economist Mahbub ul Haq, the Human Development Index (HDI) is a summary index that measures three aspects:

Life Expectancy

Knowledge (Adult literacy rate)

Standard of Living (GNI per capita)

Limitations of HDI

1) Wide difference within countries - Countries like China have widely different HDI scores depending on the region in question

2) HDI reflects long-term changes, it may not respond to short-term

3) Too narrow - HDI does not take into account other factors important to economic welfare e.g. threat of war