<5.1 LIVING STANDARDS>

--5.1.1 INDICATORS OF LIVING STANDARDS--

--WHAT DOES 'LIVING STANDARDS' MEAN?--

The STANDARD OF LIVING as defined by Websters.

--MEASURE 1: REAL GDP PER CAPITA--

--DEFINITION--

The World Bank (WB) classifies economies using the criterion of GROSS NATIONAL INCOME (GNI) PER CAPITA. This calculates the total expenditure in the economy (GDP) plus net income from assets abroad, divided by the population size. It then classifies countries in the following way:

--WHY IS IT A GOOD INDICATOR?--

The government of a country with HIGH GDP, should in theory collect a GREATER AMOUNT OF TAX REVENUE and therefore is likely to SPEND MORE AS A % OF GDP, on WELFARE and MERIT GOODS, such as HEALTHCARE and EDUCATION, to help IMPROVE LIVING STANDARDS of its citizens.

--TASK--

list the top ten countries by GDP per capita then find their happiness index ranking what do you notice? Any exceptions?
'happiness index'

--WHY IS IT A BAD INDICATOR?--

REAL GDP PER CAPITA only takes into account income earned in the economy and IGNORES many other important factors which impact the standard of living. Such as:

The distribution of income
Life expectancy
Access to education
The composition of the goods produced:
The contribution of the hidden economy:
The number of hours worked
The pollution levels
The crime level ..etc…
Dependency ratio.

--TASK--

Find an example of a country with HIGH GDP PER CAPITA, but a very LOW HDI RANKING...... ready, set go!!!!!

--MEASURE 2: HUMAN DEVELOPMENT INDEX--

--DEFINITION--

This method uses several criteria:
- - LIFE EXPECTANCY,
  - LITERACY RATE
  - INCOME PER CAPITA
The index for each country is scored between O and 1. (l being the most developed.)

--WHY IS IT A GOOD INDICATOR?--

The Human Development Index (HDI) is a composite index which not only takes into account per capita income, but also life expectancy, and education. giving a more accurate representation of wellbeing.

--WHY IS IT A BAD INDICATOR?--

EQUAL WEIGHTING OF THE COMPONENTS IS NOT REALISTIC as they do not necessarily contribute to human development in an equal way.
USING THREE COMPONENTS IS STILL TOO NARROW to be used as an indicator of living standards. For example, the HDI ignores political and economic freedom, which many consider crucial to the standards of living in a country.
THE HDI STILL DOESN'T DEAL WITH INEQUALITIES IN INCOME and wealth within and between countries, so comparisons of living standards become less meaningful.

[5.1.2 COMPARING LIVING STANDARDS]

[FACTORS]

[INDICATORS]

--HOUSEHOLD INCOME--

Generally speaking THE HIGHER THE LEVEL OF HOUSEHOLD INCOME PER PERSON, => GREATER THE ABILITY TO CONSUME GOODS AND SERVICES => THE GREATER THE STANDARD OF LIVING.

--GDP PER CAPITA--

GDP PER CAPITA:
- - GDP divided by population.
  - GDP generates income as such it shows how much the average person is earning.

--COST OF LIVING--

The COST OF LIVING refers to THE AMOUNT OF MONEY NEEDED TO COVER BASIC EXPENSES such as housing, food, taxes, and healthcare.

-GDP PER CAPITA (PPP)-

Would you prefer to earn 5000SGD and live in Singapore or 3000SGD and live in India? Even though the income is lower I would definitely prefer to live in India, but why?
The answer is that the fact that India is a very low cost country, the $3000 will afford a person a better standard of living than the $5000 in a high cost country like Singapore.
Therefore to account for difference in price levels we use GDP calculated using PURCHASING POWER PARITY or PPP values
link

--MATERIAL WEALTH--

MATERIAL WEALTH refers to the OWNERSHIP OF CONSUMER DURABLE GOODS by the average person, such as cars, jewelry, televisions, mobile phones, washing machines, and home computers.
The greater the level of material wealth, the better the standard of living tends to be.

--VEHICLES PER CAPITA

One well known indicator of material wealth is the OWNERSHIP of MOTOR VEHICLES.

--HEALTHY LONG-LIFE--

The ability to live a long and healthy life, free from the threat of diseases caused by poor sanitation, lack of access to basic healthcare and educational ignorance all impact the standard of living between countries.

--LIFE EXPECTANCY--

Generally speaking, developed countries have RELATIVELY LONGER LIFE EXPECTANCIES than developing countries.

--ACCESS TO EDUCATION--

The length of time spent in EDUCATION most often translates into a greater earning potential, and higher incomes to afford a greater standard of living.

--YEARS OF SCHOOLING--

Generally speaking, developed countries have RELATIVELY HIGHER 'MEAN YEARS OF SCHOOLING' than developing countries.

--LEISURE TIME--

Incomes allow people to consume goods and services however if work, inevitably results in less leisure time and lowers the standard of living.

--AV. WORKING HOURS--

To measure this we can use the 'average working hours per week' as an indicator. We can see that despite Singapore's high GDP per capita if we factor in the high costs of living as well as the long average hours worked, we get a different view about the standard of living enjoyed by a typical Singaporean.

--POLLUTION--

Pollution has a huge impact on the standard of living. This includes air pollution, noise pollution, river pollution, and land degradation to name but a few. All of these impact the health and sustainability of scarce productive resources.

--C02 RELATED DEATHS--

Clearly, the danger posed by pollution can result in multiple fatalities, heavily impacting the standard of living.

--TASK/DISPLAY TIME--

Create an INFOGRAPHIC, (I recommend a 4 column table style) in which you compare the living standards of THREE countries (One developed, one developing, and one LDC), in terms of the factors and indicators listed above. PLUS 3 MORE INDICATORS OF YOUR CHOICE.. You can find the data on the HUMAN DEVELOPMENT REPORT & the COUNTRY REPORTS

--STUDENT EXEMPLARY WORK--

--PAST PAPERS--

8-MARKS

6-MARKS

4-MARKS

2-MARKS

Define the ‘Human Development Index’.

COST OF LIVING: GDP PER CAPITA (PPP)

Using Purchasing power parity (PPP) figures is more accurate as it accounts for the price differentials between countries for the same goods and services and so gives a far better indication of the standard of living.

--POPULATION GROWTH--

Population growth is often an indicator of falling living standards. This is because if the growth rate is larger than the % increase in income, then this implies that average income will fall while the dependency ratio will increase. (The dependency ratio is a measure of the number of dependents aged zero to 14 and over the age of 65, compared with the total population aged 15 to 64.). Generally speaking, developed countries have RELATIVELY LOWER POPULATION GROWTH RATES & DEPENDENCY RATIOS than developing countries.

POPULATION GROWTH (%)

DEPENDENCY RATIO (%)

--INFRASTRUCTURE SPENDING--

Without spending on infrastructure such as roads, water pipelines, electricity, sewage treatment etc, the economy can never grow. Generally speaking, developed nations spend a much larger amount on these types of capital goods than developing countries.

--FOREIGN DIRECT INVESTMENT (FDI)--

Population growth is often an indicator of falling living standards if the growth rate is larger than the % increase in income, as this implies that average income will fall while the dependency ratio will increase.

--LABOUR PRODUCTIVITY--

Population growth is often an indicator of falling living standards if the growth rate is larger than the % increase in income, as this implies that average income will fall while the dependency ratio will increase.

--SIZE OF PRIMARY SECTOR--

As we have already discussed the primary sector is the most volatile in terms of supply-side shocks as well as being the least income elastic, hence we can expect that countries that have large primary sectors earn lower incomes and have lower standards of living.

--CORRUPTION LEVELS--

The actual and perceived levels of corruption present in a country discourage both domestic and foreign direct investment, which inevitably leads to less economic growth and higher living standards

--POLLUTION LEVELS--

Population growth is often an indicator of falling living standards if the growth rate is larger than the % increase in income, as this implies that average income will fall while the dependency ratio will increase.

--WORKING HOURS--

Population growth is often an indicator of falling living standards if the growth rate is larger than the % increase in income, as this implies that average income will fall while the dependency ratio will increase.

--DEVELOPING COUNTRY--

• GDP per capita - LOW

• Life expectancy - LOW

• Literacy rates - LOW

• Population growth - HIGH

• Infrastructure -

Road constructio spending

InTERNET USERS PER 100

Infrastructure refers to the system of transportation and the communications networks necessary for the efficient functioning of an economy, such as buildings, mass transportation, roads, water systems, ICT systems including the internet, airports and power supplies. According to the World Economic Forum, countries with very poor infrastructure include Bosnia and Herzegovina, Angola, Mongolia, Nepal, Lebanon and Chad. Table 21.3 shows the number of internet users per 100 people in 2012.

• Low foreign direct investment - The lack of capital resources also limits the ability of a country to create income and wealth. Foreign direct investment (FDI) refers to cross-border investment made by multinational companies and other investors. Poor countries, with their lack of economic growth and poor infrastructure, do not tend to attract FDI due to the expected high risks and low financial returns.

fdi INVESTMENTS

• Poor health care - Insufficient im·cstmem in health services hinders the ability of

a coumry to de\·clop. Health care expenditure per capita is low in LEDCs. Their

governments are unable to provide preventive and curative health care services

for the mass JX)pulation. According to the World Bank, the United States spends

$8362 per person on health care services, whereas this figure is only $21 in

Burundi, $18 in Niger, $16 in Ethiopia and just $12 in Eritrea.

• Labour productivity - output per worker - LOW to the combination of low literacy, low capital investment and poor health care abour productivity in LEDCs also tends to below.

• Public debt - Public debt refers to the money owed by the government (public sector). In general, LEDCs are far more likely to borrow money to finance their public sector expenditure, so the higher the public debt, the lower a country's standard of living tends to be. This is because the government will need to repay its loans, along with interest payments, rather than using the funds for investment in the economy. However, the huge impact of the global financial crisis has harmed MEDCs and not only LEDCs (sec Table 21.4 below). Japan tops the chart, largely due to the country's devastating earthquake and tsunami of March 2011, the country's worst natural disaster in history. In reality, it is common for LEDCs to pay more for financing their public debts, mainly due to the high- interest rates imposed and partly due to a fall in the value of their currency. This makes repayment of public debt increasingly unsustainable for LEDCs, leading to further borrowing and ever-increasing debts.

• Reliance on primary-sector output - Low-income countries tend to over-rely on the production and export of primary-sector output, such as agricultural products. These tend to ha\'e poor terms of trade in comparison with the export of manufactured products or tertiary-sector services. Table 2 1.5 compares the output from the three sectors of the economy for selected coutries.

• Corruption - A final characteristic of LEDCs is their high degree of corruption. There are huge opportunity costs of civil war, dishonest government officials, fraudulent behaviour and the purchase of arms and weapons. Corruption therefore hinders economic development and results in hugely unequal income distribution.

--DEVELOPED COUNTRY--

• Low GDP per capita - For economists, this is probably the key characteristic

of developing countries. GDP per capita is calculated by dividing the gross

domestic product of a coumry by its population to find the income level of the

average person. The lower the GDP per person, the poorer the country rends

to be. According to the World Bank, Luxembourg has the highest GDP per

head at $114508, whereas the Democratic. Republic of Congo has the lowest at

just$231.

• Low life expectancy - Life expectancy measures the number ofyears that the

average person in a country is anticipated to live for, based on statistical trends.

The lower the life expectancy, the poorer the country rends to be. Dara from the

World Bank support this, with the likes ofSierra Leone, Congo, Zambia and

Swaziland all having life expectancy ofbcrwecn 48 and 49 years.

• Low literacy rates - Literacy rates measure the proportion of the population

aged 15 and above who can read and write. Low-income countries have

insufficient investment in education and training, so their literacy rates rend

to be low. This has major consequence for employment, production and

productivity, thus negatively impacting on the GDP of the country. High -income

countries have 100 per cent literacy rates whereas low-income coumries have

very low literacy rates, such as Mali (31 per cent), Chad (34 per cent) and Guinea

(41 percent).

• High population growth- Population growth measures the annual

percentage change in the population ofa country. Poorer countries tend to

have high population growth rates for many reasons: a lack of family planning

and sex education, poor access to contraception and cultural norms (it is

common and widely accepted to have many children in some countries and

cultures).

• Poor infras t ructu re - Infrastructure refers to the system of transportation

and the communications networks necessary for the efficient functioning of

an economy, such as buildings, mass transportation, roads, \irater systems, JCT

systems including the internet, airports and power supplies. According to the

World Economic Fomm, countries with very poor infrasrrncture include Bosnia

and Herzegovina, Angola, Mongolia, Nepal, Lebanon and Chad. Table 21.3 shows

the number ofinterner users per 100 people in 2012.

Low foreign direct investment - The lack of capital resources also limits the

ability ofa country to create income and wealth. Foreign direct im·estment

(FDI) refers to cross-border investment made by multinational companies and

other investors. Poor coumries, with their lack of economic growth and poor

infrastructure, do not tend to attract FDI due to the expected high risks and low

financial returns.

• Poor health care - Insufficient im·cstmem in health services hinders the ability of

a coumry to de\·clop. Health care expenditure per capita is low in LEDCs. Their

governments are unable to provide preventive and curative health care services

for the mass JX)pulation. According to the World Bank, the United States spends

$8362 per person on health care services, whereas this figure is only $21 in

Burundi, $18 in Niger, $16 in Ethiopia and just $12 in Eritrea.

• Low lalxmr productivity - Labour productivity is a measure of the efficiency of

labour in the production process, such as output per worker (see Chapter 11). Due

to the combination of low literacy, low capital investment and poor health care ,

labour productivity in LEDCs also tends to be low.

• High public debt - Public debt refers to the money owed by the government

(public sector). In general, LEDCs are far more likely to borrow money to

finance their public sector expenditure, so the higher the public debt, the lower

a country's standard of living tends to be. This is because the government

will need to repay its loans, along with interest payments, rather than using

the funds for investment in the economy. However, the huge impact of

the global financial crisis has harmed MEDCs and not only LEDCs (sec

Table 21.4 below). Japan tops the chart, largely due to the country's devastating

earthquake and tsunami of March 2011, the country's worst natural disaster

in history.

In reality, it is common for LEDCs to pay more for financing their public debts,

panly due to the high interest rates imposed and partly due to a fall in the value of

their currency. This makes repayment of public debt increasingly unsustainable for

LEDCs, leading to funher borrowing and ever-increasing debts.

• Reliance on prima ry-sector output - Low-income countries tend to over-rely

on the production and export of primary-sector output, such as agricultural

products. These tend to ha\'e poor terms of trade in comparison with the export of

manufactured products or tertiary-sector services. Table 2 1.5 compares the output

from the three sectors of the economy for selected coumries.

• Corruption - A final characteristic ofLEDCs is their high degree of corruption.

There are huge opporumity costs of civil war, dishonest go~·ernment officials,

fraudulent behaviour and the purchase of arms and weapons. Corruption

therefore hinders economic development and results in hugely unequal income

distribution.