4.3. Indicators of Living Standards Flashcards
Economic Development Meaning
Economic growth and improvements in living standards, such as better:health, education, government, market conditions, freedom
Monetary indicators
Income per capita
Non-monetary indicators
Freedom, education, health care, life expectancy, governance, literacy, discrimination, crime, corruption
Indicators of Economic Development and Living Standards
1) GDP per capita
2) Human Development Index (HDI)
3) Measure of Economic Welfare (MEW)
4) Multidimensional Poverty Index (MPI)
GDP per capita
a measure of a country’s economic output that accounts for its number of people
GDP / population
Advantages of using GDP per capita
- Easy to calculate
- Useful for comparisons (time, country)
Disadvantages of using GDP per capita
- Narrow measure - only considers income
- Ignores non-monetary factors
- Misleading - it is an average only
- Ignores unrecorded activity
- Ignores income distribution
- Different versions - (nominal v.s real and market rates v.s. PPP)
Human Development Index (HDI)
A composite index of three equally weighted components of development (1/3 each):
- income - GNI per capita
- health - Life expectancy
- education - Expected years of schooling and Mean ave. years of schooling
0.8 to 1 - HIC
Advantages of using the Human Development Index (HDI)
- Broader measure of living standards than GDP per capita
- Includes both monetary (GNI per capita) and non-monetary factors (health, education)
Disadvantages of using the Human Development Index (HDI)
- Gives value for country as a whole - ignores differences within a country.
- Equal weighting between income, health and education.
- Ignores many other areas of development (e.g. freedom, income distribution, crime, poverty, corruption).
Measure of Economic Welfare (MEW)
measures not only the total national output (GDP) but also includes the economic welfare of the country
MEW =
value of GDP + value of leisure time + value of unpaid work - environmental damage
- economic output = value of GDP
- economic welfare = value of leisure time + value of unpaid work - environmental damage
Advantages of using the Measure of Economic Welfare (MEW)
- Comparing this measure to GDP, it is an instant reaction to all of us that this measure is better than GDP as it includes economic welfare. This is because including economic welfare would mean it could better measure the standard of living in the country
- it also takes in to account the value of environmental damage caused by industrial production and consumption, like for example pollution, which will further make the calculation of living standards accurate
Disadvantages of using the Measure of Economic Welfare (MEW)
- MEW takes value for whole country, but ignores differences within the country.
- there is GDP per Capita so there are disadvantages of using GDP per Capita too
- difficult to measure economic welfare
Multidimensional Poverty Index (MPI)
uses health, education and standard of living indicators to determine the degree of poverty experienced by a population
- Replaced the HPI (Human Poverty Index)
Multidimensional Poverty Index (MPI) Features
3 Dimensions:
1) Health (1/3)
- Child mortality (1/6)
- Nutrition (1/6)
2) Education (1/3)
- Years of schooling (1/6)
- School attendance (1/6)
3) Living Standards (1/3)
- Cooking fuel (1/18)
- Toilet (1/18)
- Water (1/18)
- Electricity (1/18)
- Floor (1/18)
- Assets (1/18)
Advantages of using the Multidimensional Poverty Index (MPI)
- flexibility - Indicator and the aggregation of indicators within dimensions are flexible and can chosen for case.
- Target the poorest more effectively.
- Compare the composition of poverty in different districts, groups, communities, regions individuals or states.
Disadvantages of using the Multidimensional Poverty Index (MPI)
- Data reflects inputs (e.g. cooking fuel) and outputs (e.g. years of schooling) but does not reflect capability.
- Health data is relatively weak / limited.
- Judgements needed where data is not available.
- Intra-household inequality may be severe but could not be reflected.
- Does not measure inequality among the poor.
- Based on publicly available data between 2006 - 2017.
Other concepts linked to Living Standards
1) Lorenz Curve
2) Gini Coefficient
3) Kuznets Curve
Lorenz Curve
a graphical representation of inequality.
- y-axis = cumulative % of national income - max 100%
- x-axis = cumulative % of population - max 100%
- 45° Line (perfect equality)
- curves for all countries are under the line of perfect equality
- near 100% the curves for countries are steepest
- from 0 to 50% the gradient is very gentle
- the curve of the country closer to the perfect equality line = more equal country
Gini Coefficient
A statistical measure of inequality.
- on the Lorenz Curve
- 0 = perfect equality
- 1 (or 100%) = perfect inequality
Gini Coefficient =
A / (A+B)
A = area above curve
B = area below curve
- the curve of the country closer to the perfect equality line = more equal country
Kuznets Curve
as an economy develops, market forces first increase and then decrease economic inequality.
- y-axis = inequality
- x-axis = income per capita
- the curve is a mountain shape
- when curve is rising = Rural-urban migration keeps wages low & provides investment opportunities for those with money
- when curve is falling - Development of welfare state (benefits) and “trickle-down” economics
- can be applied to many other things, including environmental damage.
Kuznets Curve Evaluation
- BUT: It appears to be the other way around: inequality reduces and then gets wider! (like in the US)
- AND: Inequality continues to widen.
