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
I can link living standards to growth, low unemployment, stable prices and a healthy balance of trade.
Syllabus 9570, 3.2.1(b). Standard of Living and Macroeconomics Indicators: Standard of living is affected by an economy's ability to achieve macroeconomic objectives in terms of sustainable and inclusive economic growth, low unemployment, price stability and a favourable balance of trade position
I can compare living standards over time and between countries, and say where the comparison is weak.
Syllabus 9570, 3.2.1(d). Standard of Living and Macroeconomics Indicators: Comparison of living standards over time and over space (between economies)
Make a guess
Real GNI per capita rises 6%, but the real income of the poorest fifth falls 2%. Did living standards rise?
- No, because some households lost real income.
- Yes, for everyone, because average real income rose.
- On average yes, but not for the poorest households.
Show the answer
On average yes, but not for the poorest households.
The average rose, but the gains went to others. A good judgement says who is better off and in what way.
Say who is better off, in what way and over what period, using the indicators that answer the question.
A good judgement uses several indicators, because each shows something different.
Real GDP or GNI per capita shows average material resources. Median income and the Gini coefficient show how the gains are shared. Unemployment and inflation show job security and purchasing power. Health, leisure and environmental data show non-material living standards.
Then state your judgement clearly: who is better off, in what way, and over which period.
Mixed evidence is normal. The answer might be that material living standards rose on average, but not for lower-income households, and that non-material ones fell.
Sort these
Sort each indicator by what it tells you about living standards.
Groups: Average material living standards, How the gains are shared, Non-material living standards.
- Life expectancy at birth
- Real GDP per capita at purchasing power parity
- Income of the richest 10% of households compared with the poorest 10%
- The Gini coefficient
- Average weekly working hours
- Real GNI per capita
- Days of unhealthy air quality a year
Show the answer
Average material living standards
- Real GDP per capita at purchasing power parity Adjusting for prices across countries shows what the average income can actually buy.
- Real GNI per capita It divides residents' real income by population, so it shows the average person's command over goods.
How the gains are shared
- Income of the richest 10% of households compared with the poorest 10% The ratio shows how far apart the top and bottom of the income ladder are, so it measures how evenly gains are shared.
- The Gini coefficient It measures how far the income distribution is from perfect equality.
Non-material living standards
- Life expectancy at birth It reflects health, a part of well-being that income measures leave out.
- Average weekly working hours Longer hours mean less leisure, which lowers quality of life even when income rises.
- Days of unhealthy air quality a year Pollution harms health and comfort, a cost that GDP does not subtract.
- Method
- Several indicators; say who, what and when.
| Question | Indicator |
|---|---|
| Has average output per person risen? | Real GDP per capita |
| Has residents' income risen? | Real GNI per capita |
| Is income shared more equally? | Gini coefficient, median income |
| Are jobs secure? | Unemployment and employment rates |
| Is the cost of living rising? | CPI inflation |
| Are health and education better? | HDI, life expectancy |
Worked example: A mixed record
Over three years, real GNI per capita rises 6%, real income of the poorest fifth falls 2%, unemployment falls, and average commuting time rises.
- Average material living standards rose.
- The poorest fifth are worse off in material terms.
- Falling unemployment improves job security.
- Longer commutes lower non-material living standards. Overall: better for many, but not for the poorest.
Watch out for this
One indicator is enough to judge whether living standards improved.
Each indicator shows only one part of the picture. Use several and weigh them.
Check your understanding
Real GDP per capita rose, but the Gini coefficient also rose sharply. What is the best conclusion?
- Living standards fell for most people, because inequality rose sharply.
- Most households must be better off, because the average income per person rose.
- Average material living standards rose, but the gains were unevenly shared.
Show the answer
Average material living standards rose, but the gains were unevenly shared.
Right. A higher Gini means more inequality, so many households may have gained little.