MEASUREMENTS OF STANDARD OF LIVING

GDP per capita - Definition

An approximation of the value of goods produced per person in the country, equal to the
country's GDP divided by the total number of people in the country.

GDP per capita is not a measurement of the standard of living in an economy. However,
it is often used as such an indicator, on the rationale that all citizens would benefit from
their country's increased economic production. Similarly, GDP per capita is not a
measure of personal income. GDP may increase while real incomes for the majority
decline. For example, in the US from 1990 to 2006 the earnings (adjusted for inflation) of
individual workers, in private industry and services, increased by less than 0.5% per year
while GDP (adjusted for inflation) increased about 3.6% per year.[22]

The major advantage of GDP per capita as an indicator of standard of living is that it is
measured frequently, widely, and consistently. It is measured frequently in that most
countries provide information on GDP on a quarterly basis, allowing trends to be seen
quickly. It is measured widely in that some measure of GDP is available for almost every
country in the world, allowing inter-country comparisons. It is measured consistently in
that the technical definition of GDP is relatively consistent among countries.

The major disadvantage is that it is not a measure of standard of living. GDP is intended
to be a measure of total national economic activity— a separate concept.

The argument for using GDP as a standard-of-living proxy is not that it is a good
indicator of the absolute level of standard of living, but that living standards tend to move
with per-capita GDP, so that changes in living standards are readily detected through
changes in GDP.

If average real GDP per capita is increasing, there’s a strong likelihood that: (a) more
goods and services are available to consumers, and (b) consumers are in a better position
to buy them. And while buying more things won’t necessarily help us find true happiness,
true love, or true enlightenment, it is a pretty good indicator of our material standard of
living.
But as a tool for measuring how well we live, GDP per capita has its shortcomings. There
are lots of things it doesn’t take into account, including:

Unpaid work — Real GDP per capita doesn’t acknowledge the value of housework, in-
home child care, in-home elder care, volunteer work, and community service.

Distribution of wealth — There’s always the possibility that a large share of the gains in
real GDP per capita will go to a relatively small percentage of the population. And, in the
bad old days, gains were also more likely to be skewed along gender, racial, and ethnic
lines.

Changes in the quality of life — Real GDP per capita doesn’t fully account for the value
of things like clean air, clean water, more leisure time, and increased life expectancy; nor
does it fully account for the cost of such undesirable changes as increased traffic
congestion or loss of open space.

Changes in the quality of goods — Real GDP per capita doesn’t fully reflect the fact
that your new furnace is far more efficient than your old one or that the components on
your low-end mountain bike were considered state-of-the-art five years ago. (But GDP
figures make some adjustments for quality improvements to cars, computers, and a few
other items.)

The most commonly used threshold of low income is a household income that is 60% or
less of the average (median) British household income in that year. 

Key features of this measure are:

• It uses household income rather than individual income, otherwise (for example) all
children would be considered to be in low income,
• It uses disposable income rather than pre-tax income, as this is the money that the
household has to live on.
• Incomes are adjusted for household size and composition to put them on a comparable
basis – process called equivilisation
• The threshold is defined in terms of median, rather than mean, income.  As such, it is
 comparing low-income households with those in the middle, not with the richest,
and is therefore a comparison with what can be considered 'normal' in
contemporary UK society. 
• The threshold rises or falls as median incomes rise or fall.  As such, it is clearly a
measure of relative low income.  This reflects the view that the level of income
that should be considered 'low' depends on overall levels of income in the society
in which the people live.
• This indicator measures income after deducting housing cost even though UK
government has shown some preference to measuring before deducting housing
cost – this is because housing costs can vary for people in otherwise identical
circumstances – Geographic?? Check
• The latest year for which household income data is available is 2008/09.  In that year,
the 60% threshold was worth: £119 per week for single adult with no dependent
children; £206 per week for a couple with no dependent children; £202 per week
for a single adult with two dependent children under 14; and £288 per week for a
couple with two dependent children under 14.  These sums of money are
measured after income tax, council tax and housing costs have been deducted,
where housing costs include rents, mortgage interest (but not the repayment of
principal), buildings insurance and water charges.  They therefore represent what
the household has available to spend on everything else it needs, from food and
heating to travel and entertainment.
• In 2008/09, 13½ million people in the UK were living in households below the 60%
low-income threshold after deducting housing costs.  This is around a fifth (22%)
of the population.
• This 13½ million figure for 2008/09 is unchanged from 2007/08, and is 1½ million
more than the low point in 2004/05.  The increases over the last four years follow
six uninterrupted years of decreases from 1998/1999 to 2004/05 and are the first
increases since 1996/97.
• Using a lower threshold of 50% of median income (rather than 60%), the pattern is
similar: increases in the four most recent years following decreases throughout the
previous eight years. 
• Using a still lower threshold of 40% of median income, however, the pattern is rather
different: increases in the four most recent years following unchanged numbers
throughout the previous eight years.  As a result, the number of people below this
threshold is now the highest since records began in 1979.
• Due to this there is higher income inequality in the UK because there are more people
living with less than 40% of the average median income.
• Poverty situation in UK has been deteriorating since 2004 whether using real income
• The United Kingdom has a slightly higher proportion of its population in relative low
income than the European Union average.  Of the 26 other EU countries, 9 have a
higher rate than the United Kingdom and 17 have a lower rate.
Household wealth
In economics, wealth is the net worth of a person, household, or nation,
that is, the value of all assets owned net of all liabilities owed at a point in
time
measuring the standard of living
The benchmark for measuring the standard of living in a country is to use
real national income per capita. This is found that dividing real national
income (GDP or GNP) by the total population.

The chart below shows data on per capita gross domestic product for the
UK since 1970. The data is expressed in dollars.
To make a cross-country comparison of living standards, we need to
express the data in a common currency (nearly always the US dollar). In
the chart above we see a fall in per capita GDP in 1993. This was not
because the British economy was in recession - indeed the economy
enjoyed a recovery in output and incomes in this year. The reason for the
dip in per capita income (measured in US dollars) was that the pound fell
sharply against most other currencies (following our departure from the
exchange rate mechanism). This reduced the value of UK national output
when measured in another currency. 

The strong pound since 1996 has had the opposite effect - boosting the
UK's position in the international living standard league.

Differences in living costs between countries

Adjustments can also be made for variations in price levels and the
average cost of living between countries by expressing the figures using
estimates for purchasing power parity. However fluctuations in the
exchange rate can affect the accuracy of the figures. And, there is no
guarantee that each country measures national output and incomes with
the same degree of accuracy.

Alternative indicators when measuring living standards

To come to a general judgment on living standards within an economy 

we can use a range of alternative indicators

These could include:

Ownership of consumer durables such as televisions, dish washers, home

computers
Estimates of pollution levels (see the revision notes on externalities)

Measures of  social welfare (see below) Home ownership levels and
other indicators of household wealth

SOCIAL WELFARE STATISTICS TO MEASURE THE QUALITY OF LIFE

 the number of patients per doctor - a measure of health

provision in a country
hospital waiting lists for important operations
the number of children per thousand of the population who die
each year (infant mortality rates)
the average food intake per person (measured by average
calorific intake)
the proportion of the population that can read or write - literacy
rates
average educational attainment at different age levels
crime rates
divorce rates
These statistics should indicate what proportion of the population is
enjoying a minimum standard of living although perceptions of what is
needed for a basic quality of life vary widely.

Level of educational attainment