How Economists Measure Living Standards In an Economy?

There are several ways in which economists measure living standards. These include measuring and comparing real GDP per capita, using the Human Development index, The Living Standards Measurement survey, comparing economic growth rates and using the Index of Human Poverty. Each of these methods has its own advantages and disadvantages and have many uses, such as for comparing living standards among countries and for determining levels of aid to give to countries as explored in this essay.

The World Bank and the United Nations' Standard National Accounts uses a quantitative approach to measuring living standards by comparing both real GDP per capita of countries and their economic growth.

This is the commonest approach. Countries can be ranked according to their real GDP per capita. This value is worked out by using GDP = consumption + Investment + Government spending + (exports - imports). This figure is converted to per capita by dividing by the population size so as to take into account the size of population.

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To remove the problem of inflation making comparing GDP per capita inaccurate the monetary data is used as the indicator of living standards. This is done using the consumer price index. Countries below GDP $370 per capita are said to be in absolute poverty. This information is useful in that the data produces a quantitative result that can relatively easily be collected and the results can be compared between different countries. However its use as an exact measure of living standards is bought into question. Read about the human cost of an illiterate society

The figure does not consider the distribution of income in a country; it doesn't include unrecorded activity (e.

g. grey market and subsistence) and fails to include environmental degradation. It fails to consider the types of good and services produce. For example, increases in the production of capital goods and military goods will raise GDP per capita but may well deduce living standards as the opportunity cost of such production is the consumer goods forgone.

GNP per capita in some countries is worth more to the individual than other countries, mainly due to exchange rates. As a result another similar method used to compare standards of living is to use international prices. This means comparing the purchasing power parity, which means using a common currency a comparing what you can buy for that money in each country. Therefore if money goes further in a country then the standards of living should be higher than indicated by real GDP per capital. For example Nepal is ranked 125th in the world for GDP per capita ($210).

However the GDP measured at PPP increases to $1090 and this raises its position to 103rd and perhaps better living standards than first believed by GDP per capita figures. One of the main measures of living standards and development is the Human Development Index, which is part of the UN Development Programme. The focus of the HDI is to measure average achievements in human development in a society. It builds on three basic dimensions of human life - a long and healthy life, knowledge and a decent standard of living. A high HDV value (near to 1) represents a high standard of living.

To represent the dimensions of human well being included in the HDI the following variables were chosen - life expectancy as birth for a long and lengthy life, educational attainment in terms of adult literacy rate and combined gross enrolment ratio at primary, secondary and tertiary level and GDP per capita (PPP$) for a decent standard of living. Each of these is given equal rates due to equal importance in living standards. Recently new variables have been added such as the mean years of schooling for the educational attainment component.

The HDI had had many successes and uses. Due to it incorporating many factors to show human development it has allowed countries and international aid organisations to identify the major problems of development in many LEDC's and therefore focus aid to the particular problem. Many countries have as a result of the HDI set up new ministries for human development. (E. g. in Botswana a new ministry of development was established to give proper priority to human development. ) The HDI has started a desirable healthy competition among countries to surpass its neighbours.

It is used as a strong advocacy tool at different international and global events. At the Habitat Conference in Istanbul in 1996, the differences in rural and urban HDI in many countries have been emphasised by various institutions of civil society to highlight disparities in housing. It also helps the world on a global level monitor Millennium Development Goals. However the HDI does not reflect the distributional aspect of development or the deprivational aspect of development. The World Bank established the Living Standards Measurement Study in 1980.

The LSMS collects data on many dimensions of household well being including consumption, income, savings employment, health, education, fertility, nutrition, housing and migration. Three different kinds of survey are normally used. The household questionnaire collects detailed information on the household members of a sample no more than 5000 households. It focuses on consumption, income and household characteristics (e. g. health, education and fertility). The community questionnaire asks key community leaders and groups about local infrastructure.

There is also a price questionnaire. Another measure of living standards is the Human Poverty Index. This draws attention to three essential elements - longevity, knowledge and a decent standard of living. As for the HDI the deprivation in longevity is measured by the percentage of people not expected to survive to aged 40, deprivation of knowledge is measured by the proportion of illiterate adults and the deprivation of living standards by the percentage of people without access to water, health services and those underweight.

This index measures, though, the proportion of people not benefiting from the development process and hence the extent of deprivation. The UNDP has estimated the HPI for 77 LEDC's. It ranges form 3% in Trinidad to 62% in Niger. Comparing HDI and HDP values is of use because it can help show the extent to which the achievements of development are evenly distributed within a country. The HPI also is of use in showing that human poverty remains much higher than income poverty in many countries (e. g. Egypt).

In conclusion, it is clear that these methods can only be used as a guide to showing the extent of deprivation and living standards. Real GDP per capita is a crude measure that does not take into account distribution and also factors such as literacy, life expectancy and quality of life. Other problems with the methods include that many aspects if living standards are left out and collection of data can be inaccurate. However despite these problems they can still be of immense use. They help in comparing between countries the living standards.

This is important because it not only helps a country identify its own problems for which it can improve but shows the international community as a whole the problems and inequality faced by the developing world. This is important because it allows aid to be focussed to countries and areas if greatest needs. Overall it is clear that the best approach would be to take into account all the measures involved in calculating deprivation and possibly incorporate them to provide a more accurate and detailed analysis.