What this lesson teaches
I can explain standard of living in material and non-material terms and why real income per head alone is not enough.
Syllabus 8843, 3.2.1(a). Standard of Living and Macroeconomics Indicators: Economies are primarily concerned with improving the standard of living; Standard of living involves material and non-material aspects, as measured by real national income per capita taking into account other indicators including income distribution, leisure time, quality of environment
I can read real GDP, GNI, per-capita figures, unemployment rate, CPI, HDI and the Gini coefficient.
Syllabus 8843, 3.2.1(c). Standard of Living and Macroeconomics Indicators: Macroeconomic indicators; Indicators of economic performance include real Gross Domestic Product (GDP) or Gross National Income (GNI), real GDP or GNI per capita, unemployment rate and Consumer Price Index (CPI); Human Development Index (HDI) as an indicator to reflect standard of living; Gini coefficient as an indicator to reflect income distribution
Make a guess
A country's real GDP grows 2% a year while its population grows 3% a year. What happens to output per person?
- It rises by 2% a year, the growth of real GDP.
- It rises by 5% a year, adding both.
- It falls, by about 1% a year.
Show the answer
It falls, by about 1% a year.
Real GDP per capita divides output by population. If population grows faster than output, each person's share shrinks.
Real GDP per capita divides output by population, giving average output per person.
Total real GDP can rise just because the population grows. To see what the average person has, divide by population: real GDP per capita.
If population grows faster than real GDP, real GDP per capita falls, even though the economy is bigger.
Real GDP per capita is the most common measure of material living standards. But it is an average: it does not show how income is shared, so most households may not see the gain.
It also leaves out non-material factors such as leisure, health and the environment.
- Per capita
- Divided by population.
- Limit
- An average: hides how income is shared.
Worked example: More output, more people
Real GDP rises 10% while population rises 20%.
- Real GDP per capita = 110 / 120 x 100 = about 91.7.
- So output per person fell about 8%, even though the economy grew.
- On average, material living standards fell.
Watch out for this
If real GDP rises, the average person is better off.
Not if population grows faster. Use real GDP per capita.
Check your understanding
Country A has real GDP of $500 billion and 10 million people. Country B has $90 billion and 1.5 million people. Which has the higher real GDP per capita?
- B, at $60,000 a person against A's $50,000.
- Neither, because the two are equal once population is counted.
- A, because its total real GDP is over five times larger.
Show the answer
B, at $60,000 a person against A's $50,000.
Right. $500bn / 10m = $50,000 and $90bn / 1.5m = $60,000. B is smaller in total but richer per person.