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 9570, 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 such as income distribution, leisure time, quality of environment
Make a guess
A grandmother stops caring for her grandchild for free, and the family pays a childcare centre instead. What happens to GDP?
- It rises, even though the same care is given.
- It stays the same, because the care is the same.
- It falls, because the grandmother stopped working.
Show the answer
It rises, even though the same care is given.
Unpaid care is not counted in GDP. Paid childcare is. So measured output rises without any rise in care.
GDP counts market output, but leaves out unpaid work, leisure and damage to the environment.
GDP measures the value of output, not well-being.
It leaves out unpaid work, such as caring for children or elderly parents at home. If that work is replaced by paid care, GDP rises even though the same care is provided.
It does not subtract the costs of growth: longer working hours, stress, pollution and the using up of natural resources.
So a rise in GDP can overstate the rise in living standards. Singapore's Green Plan 2030 reflects the idea that growth must be balanced with environmental quality.
- GDP leaves out
- Unpaid work, leisure, pollution, resource depletion.
Worked example: Paid childcare replaces family care
A household starts paying for childcare that a grandparent used to provide for free. The parent who used to share the care now takes a paid job.
- Measured output rises: the paid childcare and the new job both count in GDP.
- But the care itself is the same as before; only its payment changed.
- The family may have more income but less time together.
- GDP rises by more than the gain in well-being.
Watch out for this
Everything valuable that people do is counted in GDP.
Unpaid household work and volunteering are left out, and the costs of growth, like pollution, are not subtracted.
Check your understanding
A factory's output rises, but it pollutes the air more. How does GDP treat this?
- It subtracts the cost of the pollution from the value of the extra output.
- It counts the extra output but does not subtract the pollution.
- It counts neither the output nor the pollution.
Show the answer
It counts the extra output but does not subtract the pollution.
Right. So GDP overstates the gain in living standards.