Chapter 32- Living Standards

Question 1

Human Development Index(HDI)

Answer 1

it is a measure of living standards which takes into account income, education and life expectancy.

Question 2

Genuine Progress Indicator(GPI)

Answer 2

a measure of living standards that takes into account a variety of indicators including income, leisure time, distribution of income, and environmental standards.

Question 3

Real GDP per head/ per capita

Answer 3

Real GDP per capita is a measurement of the total economic output of a country divided by the number of people and adjusted for inflation. It’s used to compare the standard of living between countries and over time.

Question 4

Purchasing Power Parity

Answer 4

It is an exchange rate based on the ratio of the price of a basket of products in different countries

Question 5

Increase in Real GDP per head

Answer 5

not always good
average income rising could be caused by income of top 1% increasing massively while rest remain the same(major income inequality)
higher output of demerit goods would increase GDP but increase in supply would negatively effect health and life expectancy(eg: cigarettes)
Rise in police services due to increased crime rates is bad
GDP might understate products available on the market due to unreported economic activity but might overstate it if the quality of output is falling
Output may rise but working conditions, pollution, working hours may also increase

Question 6

Comparing Living Standards Between Countries

Answer 6

GDP per head (takes into account differences in population size and accounts for inflation)
It is not a proper indicator because it doesnt account for distribution of income, size of informal economy, working hours and conditions, composition and quality of output and environmental conditions.

Countries initially measure their gdp in their own currency, but to avoid distorted results the gdp is converted to a common units. This could result in major inaccuracies as the value of currencies change on an hourly bases.
eg. if $1=100 KSh, the gdp of kenya would be $12 billion. If the exchange rate changed to $1=80 KSh, the new gdp would be $15 billion when their production remains the same.

To combat this, economists use PPP. this is where they use an exchange rate based on the buying power of a currency in their own country. Eg: if a basket of products of products can be bought in the US for $5000 and the same basket can be bought in Kenya for 45000 KSh, the exchange rate would be 1:9. This figure is unaffected by market changes or changes in the price of currencies.

Question 7

HDI(Human Development Index)

Answer 7

wider measure than real GDP
includes real gdp per head, life expectancy at birth, mean and expected years of schooling
countries are categorized in very high human development, high human development, medium human development, low human development
shows that economic development and human progress may not always match
doesnt consider political freedom, environment. differences in life expectancy, education and income distribution between males and females and rural and urban areas is not covered

Question 8

GPI(Genuine Progress Indicator)

Answer 8

Starts with gdp
Adjusts for income distribution, GPI rises when poor receive a higher proportion of income and falls when income is more unevenly distributed
Makes number of deductions and additions
Deducted items include cost of crime, traffic accidents, carbon dioxide emissions, etc
Added items include value of housework and volunteer work also increases in leisure time

Question 9

Wealth

Answer 9

it is a stock of assets which have financial value. Eg. shares, government bonds, etc

Question 10

Causes of Differences in Living Standards

Answer 10

Living standards differ due to differences in income, wealth, education, healthcare, level of pollution, working hours.
income may be unevenly distributed unevenly due to uneven distribution of wealth, as the income from wealth adds to earned income
households with more workers are likely to have a higher income than households with one or no workers
wages of workers are determined by their skill, qualifications, working hours. High skilled workers have higher demand and hence higher wages. Full time workers usually earn more than part-time workers. people who depend on state benefits for their living likely have a low income
Wealth is unevenly distributed due to differences in inherited assets , savings and entrepreneurial skills. the more a person can save the wealthier they become. this gives rise to the phrase that wealth creates wealth because the more wealth you have the more you can save. People with entrepreneurial flair can make a business from scratch become wealthy.