QUESTION 1: ANALYSE CRITICALLY THE DIFFERENT METHODS OF MEASURING

DIFFERENCES IN THE STANDARD OF LIVING OF INHABITANTS WITHIN A COUNTRY

AND BETWEEN COUNTRIES.

WHAT IS MEANT BY STANDARD OF LIVING?

“Standard of living is defined as the level of welfare available to individual or to the group of
people. It concerns goods and services people are able to consume and the resources they
have access to.” (Cvrlje&Ćorić, 2010). In simpler terms, the Cambridge Dictionary has
defined standard of living as the “amount of moneyand comfort people have in a particular
society”.

However, the notion of standard of living can be said to be subjective since different
economists have defined standard of living, each using different terms and have evaluated
it using different methods, each being distinctive of one another. For instance, living
standard can be seen as “economic freedom” by economist, Amartya Sen.

The different methods of measuring standard of living will be developed further.

METHODS

1. Gross Domestic Product Per Capita

One of the most used measures of standard of living is Gross Domestic Product (GDP)
Per Capita.

Gross Domestic Product (GDP) reflects the value of final goods and services produced by
factors of production within a country. Hence, it shows the income earned by the residents
of a country regardless of where they are from, for producing goods and services within the
country in a given year. GDP can be calculated using two methods, the first one being the
Expenditure Approach which is also known as the spending approach.It calculates
spending by the different groups that participate in the economy. GDP calculated by using
this approach is evaluated by using the following formula:

Gross Domestic Product = Consumption (C) + Government Spending(G) + Investment (I) +

Net Exports (NX).

Consumption in the above formula refers to private consumption expenditures or

consumer spending within a country’s economy. It also includes durable goods(items with

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a lifespan greater than three years), non durable goods such as food and clothing, or
services.

On the other hand, government spending represents total government expenditures,

including salaries of government staff, infrastructure, public schools and military
expenditure while investment represents the total of a country’s investments spent on
capital equipment, inventory and housing. It is to be noted that business investment is a
fundamental component of GDP since it involves the increase in productive capacity of an
economy and boosts in employment levels.

Net exports are calculated by subtracting total exports from total imports. In addition to
this, another way of evaluating net exports is whenthe imports that are purchased by
domestic consumer, are deductedfrom the goods and services that an economy makes that
are exported to other countries.

The second method of calculating GDP is the Income Approach. The Income Approach
involves the calculation of the income earned by adding all factors of production in an
economy, including the wages paid to labor, the rent earned by land, the return on capital
in the form of interest and corporate profits. It can be calculated by using the following
formula:

Gross Domestic Product (GDP) = Total National Income + Sales Taxes + Depreciation + Net
Foreign Factor Income.

The Total National Income refers to the sum of all wages, rent, interest, and profits while
the Sales Taxes represent the consumer taxes imposed by government on the sales of
goods and services.

Furthermore, depreciation refers to the cost allocated to a tangible asset over its useful life
and the Net Foreign Factor Income represents the dissimilarity between the total income
that a country’s population and businesses generate in outlandish countries, versus the
total income foreign citizens and companies in that particular country.

Consequently, the GDP Per Capita is defined as a metric that breaks down a country’s
economic output per individual. It is also used by economists to analyze the welfare of a
particular country based on its economic growth.

GDP per Capita is calculated by the following method:

GDP Per Capita = GDP of the Country ÷ by Population of that Country

2. Real GDP Per Capita

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Contrastingly to GDP Per Capita, Real GDP Per Capita, which is another method of
calculating a country’s standard of living, is a single indicator of economic development
that calculates the value of national output of a country. It is the most used single indicator
of standard of living within a country and is calculated as follows:

Real GDP Per Capita = Real GDP ÷ by the population.

Real GDP is defined as a calculation of economic output that accounts for the consequences
for both inflation as well as deflation.

Real GDP = Nominal GDP ÷ by GDP deflator

3. Gross National Income

Additionally, there is another method as to how we can calculate the standard of living of a
country which is Gross National Income (GNI), an alternative single indicator which also
calculates Real GDP per person but includes the total value of what the country earns from
foreign investments. However, GNI uses GDP and two different types of income
circumstances:

 Income from citizens and businesses earned abroad [A]

 Income remitted by foreigners living in the country back to their home countries[B]

This gives the formula:

GNI = GDP+ [(A) – (B)]

4. Human Development Index

Apart from this, there is Human Development Index (HDI)which is defined as “a composite
index measuring average achievement in three basic dimensions of human development-a
long healthy life, knowledge and a decent standard of living” as stated in the Human
Development Report 2020. It is also used by the UN Development Programme each year in
its Human Development Reports to produce a sort of league table of countries, each of
which are placed in one or three divisions: developed, developing, or underdeveloped. HDI
is calculated by using the following formula:

HDI = 3√LEI.EI.II
Whereby LEI represents the Life Expectancy Index, EI represents Education Index and II
represents Income Index.

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 5. Happy Planet Index

In addition to the above, we have the Happy Planet Index (HPI) which has been defined as
“a measure of sustainable well-being, or the ecological efficiency with which nations achieve
their levels of well-being” by the Centre for Well-Being, nef (the new economics
foundation), UK which developed it as “a headline indicator of progress.”

HPI is calculated as follows:

HPI = Wellbeing x Life Expectancy x Inequality of Outcomes divided by Ecological Footprints.

6. Measure of Economic Welfare

Another method used to measure the standard of living within a country is the Measure of
Economic Welfare (MEW) which involves the measure of total national output, to include
items that help to ameliorate economic well-being. MEW is calculated by using the
following formula:

MEW = Value of GDP + Value of Leisure Time + Value of Unpaid Work – Value of
Environmental Damage

FACTORS INFLUENCING STANDARD OF LIVING

Moreover, there exist numerous factors which influence the evaluation of the standard of
living which are as follows:

 Average Income
 Consumer Spending
 Housing Prices
 Poverty rate in an area
 Available goods and services
 Employment Levels

MEASURE OF STANDARD OF LIVING BETWEEN COUNTRIES

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Among all the methods used to measure the standard of living within a country which have
been explained above, the Gross National Income Per Capita is also used to measure
standard of living between countries. The GNI Per Capita involves, as it has been detailed
previously, the calculation of income to the population of a particular country. More
specifically, it is used widely since it involves the comparison between countries of
different population size.

IMPACT OF COVID-19 ON STANDARD OF LIVING

The outbreak of the Covid-19 has impacted every single life on Earth. People have had to
review their ways of living so as to adapt themselves to a new lifestyle, that is, to include
the presence of the virus in their lives. Similarly, the coronavirus has affected to a great
extent standard of livings around the globe.

“The pandemic will do lasting damage to people’s living standards around the world”,
International Monetary Fund (IMF).

It has been predicted by the IMF that the world will suffer from a deep recession resulting
in a persistent loss of output. This will have a considerable impact in standard of living
across the globe. “After the rebound in 2021, global growth is expected to gradually slow to
about 3.5 percent into the medium term. This implies only limited progress toward catching
up to the path of economic activity for 2020–25 projected before the pandemic for both
advanced and emerging market and developing economies. It is also a severe setback to the
projected improvement in average living standards across all country groups. The pandemic
will reverse the progress made since the 1990s in reducing global poverty and will increase
inequality,” International Monetary Fund.

Furthermore, the rate of unemployment has been anticipated to increase due to the
emergence of the Covid-19 pandemic, thus leading to a long-term effect on standard of
living. As a result, the changes are going to be long and tough especially for people who are
not so well-off.

CRITICAL ANALYSIS

GDP, being the most frequently used measure of standard of living, has nonetheless,
attracted a lot of criticism which indicates that GDP might not be the most suitable metric
for standard of living. For instance, “Equity, dignity, happiness, sustainability – these are all

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fundamental to our lives but absent in the GDP. Progress needs to be defined and measured in
a way which accounts for the broader picture of human development and its context ” (Helen
Clarke, United Nations Development Programme).

In other words, GDP fails to take into account determining factors like income disparity,
happiness, crime rate, environmental quality, and levels of health. Therefore, a country
might be evaluated as having a very high standard of living when, in fact, only a relatively
small proportion of the population lives well, while the bulk of the population lives in
extreme poverty, not benefitting from the country’s high GDP rate.

Consequently, various alternative indicators have been developed to cater for this
deficiency. As a result, many economists believe that GDP should not be the sole measure
for calculating standard of living.

On the other hand, Human Development Index has also been criticized for the lack of any
variable referring to the environment. In a Report denominated “EVALUATING LIVING
STANDARD INDICATORS”, Naďa Birčiaková, Jana Stávková, Veronika Antošová have
stated that “even though the HDI does not include such a variable, the relationship between
this index and frequently monitored indicators of human activity and environmental damage,
such as CO2 emissions, exists and is positive. Activities that send carbon dioxide into the
atmosphere are those involved in the production, transport, and consumption of goods.
Countries that have higher growth dynamics of the HDI also have a higher rate of growth of
emissions in the air.”

To sum up, standard of living needs to be evaluated using factors such as population, health
levels, education, environmental impacts. Therefore, HDI is quite likely to englobe most of
these factors and can be said to be a more accurate measure of standard of living.

CONCLUSION

In the light of the above, it can be said that the criticisms made on the various indicators of
standard of living is justified since it does not reflect a true value of living standards.
However, it needs to be highlighted that finding the most accurate measure of standard of
living can prove to be quite difficult because of the reasons mentioned earlier. Therefore,
more research needs to be conducted.

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Reference lists:

Birčiaková , N., Stá vková , J. and Antošová , V. Evaluating Living Standard Indicators.

Cvrlje, D. and Ćorić, T. (2010). Macro & micro aspects of standard of living and quality of life
in a small transition economy: The case of Croatia. Zagreb: University of Zagreb.

International Monetary Fund. 2020. World Economic Outlook: A Long and Difficult Ascent.
Washington, DC, October

Nussbaum, M. and Sen, A. (1933) The Quality of Life. Oxford: Oxford University Press.

Sen, A. (1987). The Standard of Living. The Tanner Lectures on Human Values. Cambridge:
Cambridge University Press.

United Nations Development Programme (2020). Human Development Report 2020, The
next frontier Human development and the Anthropocene. New York.

Online references:

https://corporatefinanceinstitute.com/resources/knowledge/economics/gdp-formula/

http://happyplanetindex.org

http://www.hdr.undp.org/

http://hdr.undp.org/en/content/calculating-indices

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