Uses of national income data and Living standards Flashcards
What is used to measure the level and changes of average living standards?
The baseline indicator is real national income (GDP or GNI) per capita. Real means that income data has been adjusted for inflation.
PPP
Purchasing power parity adjustment is made when comparing standards of living across countries. It measures how many units of one country’s currency is needed to buy the same basket of goods and services with a given amount of another currency.
PPP example
is a basket of goods is $450 in USA but $150 in the UK, the PPP is 3:1. However is the GDP/Capita is more then 3x higher in the USA, the SOL can be argued to be better
GDP per capita
Measures the average economic output per person in a country. It helps us understand the average living standard and provides a way to compare economic performance of countries with different sizes.
Limitations of using GDP for comparison
-Lack of information provided on inequality
-Quality of goods and services
-Does not include unpaid or voluntary work
-Differences in hours worked
-Environmental factors
Lack of information provided on inequality
The distribution of income in an economy is provided as an average (GDP/Capita). The differences in SOL within the same country can be significant.
Quality of goods and services
It provides no information on the quality of goods and services. If quality worsens but prices are lower, the SOL is judged to have increased when it may have actually decreased.
Does not include unpaid or voluntary work
If it would included then GDP/capita would be higher. E.g. some economies have high levels of childcare. This increases SOL but isn’t recorded in any way
Differences in hours worked
It does not capture the amount of time taken to produce the GDP/capita. If one country takes less time to generate the same income, it has a higher SOL.
Environmental factors
it does not capture the environmental and health impacts of generating income within a country (externalities). If a country generates the same income with less externalities, it has a higher SOL.
