What this lesson teaches
I can compare living standards over time and between countries, and say where the comparison is weak.
Syllabus 8843, 3.2.1(d). Standard of Living and Macroeconomics Indicators: Comparison of living standards over time and over space (between economies)
Make a guess
A headline says: "Real GDP per capita grew 6% last year but only 1% this year, so people are worse off." Is it right about output per person?
- Yes. Growth fell by 5 points, so output per person fell.
- Yes, because 1% growth is the same as no growth.
- No. Output per person still rose, just slowly.
Show the answer
No. Output per person still rose, just slowly.
Growth of 1% is still growth. Real GDP per capita reached a new high this year; it only rose more slowly than last year.
To compare over time, use real per capita data, then check distribution and non-material factors.
Start with real GDP (or GNI) per capita, so that price changes and population growth are removed.
Remember that slower growth still means a rising level. If growth falls from 5% to 2%, output per person is still rising, just more slowly.
Then check whether the gains are shared: median household income shows what a typical household receives.
Finally, consider non-material factors: working hours, health, pollution and stress. Data can also be revised, and a comparison starting in an unusual year, like a recession, can mislead.
- Use
- Real per capita data.
- Slower growth
- Still a rising level.
Worked example: Slower growth, higher output
Real GDP per capita rises from an index of 100 to 105, then to 107.1. Over the same period, median real household income does not change.
- Growth slowed from 5% to 2%, but output per person kept rising.
- The average person's material living standard rose.
- But the median household saw no gain, so the growth went mainly to others.
- Living standards rose for some, not for the typical household.
Watch out for this
Slower GDP growth means living standards are falling.
Positive growth, even if slower, still means output per person is rising.
Check your understanding
Real GDP per capita growth falls from 4% to 1%. What happened to real GDP per capita?
- It fell by 3%, because growth dropped by 3 points.
- It kept rising, but more slowly.
- It stayed the same, because growth is close to zero.
Show the answer
It kept rising, but more slowly.
Right. 1% growth is still growth.