1b Macroeconomics: Key Economic Indicators - Living Standards and its Indicators

Living Standards and its Indicators

State the 2 types of standard of living (SOL).

• Material standard of living

• Non-material standard of living

Define material standard of living (SOL).

Material standard of living (SOL) can be indicated by the quantity of goods and services consumed by the average person in a country in a given time period.

Explain which economic performance indicator is typically used to measure material SOL.

Real GDP per capita.

Explanation:

• “Real”: eliminates effects of inflation through holding prices at a constant level

• “GDP”: value of final goods and services produced within the geographical boundary of a country during a given period of time

• “per capita”: gives an average value (of good and services) for each resident

State the limitations of using Real GDP per capita.

• Income distribution

• Composition of GDP

Define non-material standard of living.

Non-material standard of living refers to the qualitative aspects of life.

It is a broad-based measure of welfare and can be in terms of access to good quality healthcare, education, safety, freedom, little interference, or tolerable and sustainable level of stress, displacement, depletion of non-renewable resources and pollution, among many other aspects.

Explain the use of Real GDP per capita as an indicator of non-material SOL.

Real GDP per capita may function as an indirect proxy for non-material welfare, as a rise in average income levels allow consumers to enjoy more and better quality goods and services that enhance their non-material welfare.

List the common welfare indicators.

• Healthcare - life expectancy rates, infant mortality rates

• Education - literacy rates, mean years of schooling, highest qualification attained by the population

• Pollution - pollution standard index (PSI)

• Stress level - number of hours worked per week or annually, job satisfaction surveys

• Security - crime rates, corruption perception index

Explain the limitations of welfare indicators.

• Real GDP per capita
  Real GDP per capita may be positively related with certain aspects of non-material welfare, but negatively related with other aspects.

• Qualitative or welfare indicators
  They are highly subjective because fundamentally welfare cannot be quantified.
  Proxies are highly limited as collection of such data is costly and may be inaccurate.
  E.g. impossible to measure security and happiness, measurement of number of doctors implies nothing about healthcare quality or its accessibility

Welfare indicators need to be constantly reviewed and refined in order to isolate the effect they mean to measure.

List the common composite indicators for standard of living.

• Human Development Index (HDI)

• Measure of Economic Welfare (MEW)

• Index of Sustainable Economic Welfare (ISEW)

• Organisation of Economic Cooperation and Development (OCED) Your Better Life Index

Explain the human development index (HDI).

The human development index (HDI) is the most widely used indicator and it measures the average attainment of a long and healthy life, knowledge and a decent material standard of living.

Includes measurements of life expectancy at birth, mean number of years of schooling for adults and expected years of schooling for students, and also the PPP-adjusted real GNI per capita.

Explain the measure of economic welfare (MEW).

The Measure of Economic Welfare (MEW) adjusts measures of total national output such as GDP or GNI by adding the value of leisure and of transactions in the underground economy.

Explain the index of sustainable welfare (ISEW).

The index of sustainable welfare (ISEW) balances the GDP with income distribution, costs of pollution, environmental damage and resource depletion.

Explain the OECD Your Better Life Index.

The OCED Your Better Life Index attempts to measure welfare based on what people perceived to be important to them.

Explain the limitations of composite indicators of SOL.

• Subjectivity - difficulties in determining the weightage of each aspect of SOL.
  E.g. a country may rank lowly using the OECD Your Better Life Index because of a lack of social relationships. However, the residents in the country may not value social relationships as much as another country, and may enjoy more happiness if they had more privacy instead.

Explain the limitations of the Human Development Index (HDI).

• does not take into account of qualitative factors, such as cultural identity and political freedoms (human security. gender opportunities and human rights, etc.), biodiversity, gender inequality.

• does not take into account income distribution — if income is poorly distributed, human development is also inequitable

State the 2 ways you may compare living standards.

• across time (within a country itself)

• across geographical regions/over space (between countries)

Define purchasing power parity (PPP).

Purchasing power parity (PPP) is a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries.

Explain how the purchasing power parity (PPP) works.

Purchasing power parity will need to take into account the prevailing exchange rate, and adjust them for differences in cost of living.

State the limitations of PPP-adjusted real GDP per capita.

• Difficulties in determining the basket of goods

• Difference in consumption patterns based on context of countries

• Difference in accounting procedure

• Omission of non-marketed transactions