What this lesson teaches
I can use real GDP per head and the HDI to measure living standards and weigh each measure.
Syllabus K343, 5.1.1. Indicators of living standards: real Gross Domestic Product (GDP) per head; Human Development Index (HDI) and its components; advantages and disadvantages of real GDP per head and HDI as indicators
Make a guess
Country A has a higher GDP per head than country B. Must most people in A be better off?
- Yes, because GDP per head measures happiness.
- No. An average can hide inequality.
- Yes. Higher GDP per head means everyone earns more.
Show the answer
No. An average can hide inequality.
A few very rich people can raise the average. GDP per head also says nothing about health, schooling or the environment.
Real GDP per head measures average income; the HDI adds health and education for a wider view of living standards.
Real GDP per head is real GDP divided by the population. It shows the average output, and so the average income, per person. It is easy to calculate and to compare over time.
Its weaknesses: it is an average, so it hides inequality. It ignores unpaid work, such as caring for family, and the hidden economy. It says nothing about pollution, working hours or health. Comparing countries also needs adjusting for different price levels.
The Human Development Index (HDI) combines three things. Health is measured by how long people are expected to live. Education is measured by years of schooling. Income is measured by national income per head. The score runs from 0 to 1, and higher is better.
The HDI gives a broader picture than income alone. But it still leaves out inequality, the environment, political freedom and the quality of education and healthcare.
- Real GDP per head
- Real GDP / population: average income.
- HDI components
- Life expectancy, years of schooling, income per head.
- Limits
- Averages hide inequality; omit environment, unpaid work, freedom.
Worked example: Comparing two countries
Suppose Country A has higher GDP per head than Country B, but a lower HDI.
- GDP per head says A's people have higher average income.
- The lower HDI suggests A does worse on health or education, for example shorter lives or fewer years in school.
- Conclusion: income alone may overstate A's living standards.
- Better judgement: use both indicators, plus data on inequality.
Watch out for this
A country with high GDP per head must have a high standard of living for everyone.
GDP per head is an average. A few very rich people can raise it while many others stay poor. It also ignores health, education and the environment.
Check your understanding
Which of these is part of the Human Development Index?
- The inflation rate
- Life expectancy
- The unemployment rate
Show the answer
Life expectancy
Right. Health is measured by life expectancy.
Check your understanding
One economy has real GDP of $300 billion and 6 million people; another has $900 billion and 30 million people. Which has more output per person, and by how much?
- The second, as its total real GDP is three times larger
- Neither, as each has $30,000 per person
- The first, by $20,000 per person
- The first, by $600 billion of output
Show the answer
The first, by $20,000 per person
Right. $300bn / 6m = $50,000 per person, and $900bn / 30m = $30,000.
Check your understanding
Which three things does the Human Development Index combine?
- GDP, exports and population size
- Income, life expectancy and schooling
- Income, inflation and unemployment
- Life expectancy, pollution and crime
Show the answer
Income, life expectancy and schooling
Right. The HDI measures a decent standard of living, a long and healthy life, and knowledge.