Indicators of a country’s standard of living (SOL) and Quality of Life QOL

Factors that determine a Country’s Standard of Living

The standard of living is defined as the level of wealth experienced by a county which is
indicated by the average disposable income of the population, ownership of capital equipment,
the level of research and access to modern technology and the quality and quantity goods and
services enjoyed by citizens.

 Level of goods and services available: goods and services are needed to satisfy the needs and
wants of a society.
 Average disposable income: per capita GNP reveals the average amount of earnings of each
person in an economy.
 Ownership of capital equipment: Capital goods/investment goods are used to create
consumer goods and services locally and for export.
 Access to modern technology: countries with a high standard of living must have access to
modern technology to remain competitive maintain a high productivity level.
 Research and technology leads to innovation and increases production.

Quality of life is a more subjective and intangible term than standard of living. As such, it can
often be hard to quantify. The factors that affect the overall quality of life vary by people's
lifestyles and their personal preferences. Regardless of these factors, this measure plays an
important part in the financial decisions in everyone's lives. Some of the factors that can affect a
person's quality of life can include conditions in the workplace, healthcare, education, and
material living conditions.

Similarly, the quality of life can vary between people, making it a flawed indicator as well.
There are various segments of the population that may have a lower quality of life compared to
others. They may experience discrimination in society and the workplace or don't have access to
clean drinking water, proper healthcare, or education. Quality of life depends on many other
factors apart from just GDP.

Quality of life measures

Human development index (HDI)

Genuine Progress Indicator (GPI)
Human Development Index HDI

The Human development index looks at three main factors – living standards, health and
education
Genuine Progress Indicator GPI
The GPI includes a wide measure of factors affecting the quality of life. In particular, it includes
material well-being, but also time/leisure factors and the natural environment. The GPI measure
includes:

GPI = A + B – C – D + I

 A is income weighted private consumption

 B is value of non-market services generating welfare
 C is private defensive cost of natural deterioration
 D is cost of deterioration of nature and natural resources
 I is an increase in capital stock and balance of international trade

Difference between the standard of living and quality of life

Whereas the standard of living is measured by physical quantity (tangible), a country’s quality of
life is determined by the quality of goods and services enjoyed by citizens (intangible). These
include: safety (low crime rates), good diet and nutrition, environmental quality, quality of health
and educational facilities, life expectancy, rate of infant mortality and the access to public
utilities such as water.

Also the standard of living is mainly determined by the per capita income while the quality of
life is determined by intangible subjective factors.

Alternative measures of the Standard of Living

 The Human Development Index (HDI) (Per capita income, literacy rates, inflation)
 Physical quality of Life (infant mortality rate, literacy rates, life expectancy)
 Measure of Economic Welfare (NI + merit goods – demerit goods)
National Income

The national income of a country is the total income earned by that country from the production
of goods and the provision of services in a given year after deducting depreciation. It therefore
measures the level of economic activity of a country within a year. Note depreciation of assets is
taken into account when measuring national income.

It can also be defined as the total money value of goods and services produced by a country over
a year.

Circular Flow of Income

Businesses produce and households consume. Households owns the factors of production (land,
labour capital and enterprise). Firms must purchase these factors of production to produce.
Wealth flows from one form to another as follows:

Income = Expenditure = Output

Gross Domestic Product (GDP)

GDP is the total money value of all output produced within a country over a year. The word
‘domestic’ refers to income earned from local production only.

Gross National Product (GNP)

GNP is the total money value of all output produced over one year, both within a country and
from its overseas investments.

Therefore GNP = GDP + overseas earnings by nationals (Net Income from Foreign Assets)

Net Income from Foreign Assets- also called Net Property Income from Abroad. This is
calculated by subtracting payments to foreigners owning local assets from income received
from assets held abroad by citizens. This figure can be positive or negative.

Net National Product (NNP) or National Income (NI)

NB: The definition for national income includes adjustments for depreciation (reduction in
capital stock).

National Income (NI) = GNP- depreciation

Since GNP figures do not accurately measure the standard of living, the following indices may
be used.

Per capita GNP

This is calculated by dividing a country’s GNP by its total population. That is,

GNP

Total population

Thus if a country’s GNP is $40,000,000 and its total population is 5,000, its per capita GNP
would be $8,000.

40,000,000 = 8,000

5000

Thus each citizen enjoys on an average $8,000 worth of goods and services.
Impact of National Income on Standard of Living and Quality of Life

An increase in National Income is usually due to increased output of goods produced, increased
incomes or increased expenditure. These are all indicators of positive growth in the economy
hence giving an increase in the standard of living. If the incomes are not evenly distributed then
the standard of living of the population will be uneven. Additionally an increase in the incomes
of the population does not mean that their quality lives have improved as access to clean water,
health care and education may have received little or no investment.

THERE ARE THREE METHODS OF CALCULATING NATIONAL INCOME

1. Expenditure Method

• The total expenditure incurred by the society in a particular year is added together to get
that year’s national income.
• Components of Expenditure:
– personal consumption expenditure
– net domestic investment
– government expenditure on goods and services, and
– net foreign investment

The equation for NI using this approach is:

C: Household spending

+ I: Capital Investment spending

+ G: Government spending

= GNP (at market prices)

+ Exports of Goods and Services

- Imports of Goods and Services

= GNP (at factor cost)

- Depreciation

= National Income
 2. The Income Method: adding factor incomes

• The net income received by all citizens of a country in a particular year, i.e. total of net
rents, net wages, net interest and net profits. (GDP at factor cost).
• It is the income earned by the factors of production of a country.
• Add the money sent by the citizens of the nation from abroad and deduct the payments
made to foreign nationals (individuals and firms) (GNP at factor cost) or Gross National
Income (GNI).

Here GDP is the sum of the incomes earned through the production of goods and services. This
is:

Income from people in jobs and in self-employment

+ Profits of private sector businesses +

+ Rent income from the ownership of land

= Gross Domestic product (by factor incomes)

+ Net Property Income from Abroad

= GNP

- Depreciation

= National Income

We can also add income from Government Activities.

Only those incomes that come from the production of goods and services are included in the
calculation of GDP by the income approach. We exclude:

 Transfer payments e.g. the state pension; income support for families on low incomes;
the Jobseekers’ Allowance for the unemployed and welfare assistance, such housing
benefit.
 Private transfers of money from one individual to another.
  Income not registered with the Inland Revenue or Customs and Excise. Every year,
billions of pounds worth of activity is not declared to the tax authorities.

3. Product (or Output) Method

The market value of all the goods and services produced in the country by all the firms across all
industries are added up together.

GDP

+ Exports

- Imports

= GNP

- Depreciation

= National Income

• Process
– The economy is divided on basis of industries, such as agriculture, fishing, mining
and quarrying, large scale manufacturing, small scale manufacturing, electricity,
gas, etc.
– The physical units of output are interpreted in money terms
– The total values added up. (GDP at market price)
– The indirect taxes are subtracted and the subsidies are added. (GDP at factor cost)
– Net value is calculated by subtracting depreciation from the total value (NDP at
factor cost).
 Economic Growth and Development

Economic growth refers to an increase in the size of a country's economy over a period of time.
The size of an economy is typically measured by the total production of goods and services in
the economy, which is called gross domestic product (GDP).

Economic growth can be measured in ‘nominal’ or ‘real’ terms. Nominal economic growth refers
to the increase in the dollar value of production over time. This includes changes in both the
volume of production and the prices of goods and services produced. Economists normally talk
about real economic growth – that is, increases in the volume produced only, which takes away
the effect of prices changing. This is because it better reflects how much a country is producing
at a given time, compared with other points in time.

Additionally it is the expansion of national income. The rate of expansion is usually measured
from one year to the next. Economic growth can be achieved if countries increase their capacity
to produce. It is a quantitative increase in production.

Economic growth can be generated by:

 The discovery of new resources

 The more efficient use of existing resources
 Improvements in technology
 Improved labour efficiency

Negative Growth – This situation exists when there is a fall in productive capacity from one
period to another. It may also describe a failure of the economy to expand production.

Growth without Development- Economic growth can occur without development. While the
economy expands and the National Income increases the poverty and unemployment rates has
increased as well due to unequal distribution of income, corruption and fraud.

Economic Development- This describes qualitative changes in the economy. It refers to

improvements in the standard of living, human capital development and the enjoyment of
freedoms. It is sustained economic growth accompanied by policies that bring about structural
changes such as increase in exportation, decrease in importation, lesser dependence on foreign
aid and important infrastructural development. These changes will allow for higher levels of
national income. Measures of economic development include: Human Development Index,
Infant mortality rate, literacy rates.
 Role of Education or Human Resource Development (HRD) In Economic Growth and
Development

Educated and skilled human resources know how to make the most of natural resources. They
are trained to acquire skills to manage a nation’s resources. This is why it is the most important
resource in a country and education is important in national development. Education plays an
inevitable role in human development.

When it comes to human values in education, we cannot forget how they can shape the thoughts
and actions of a child. This is the reason why educational institutions now give special focus
on value based education.
It helps students become more responsible and sensible and understand the perspective of life in
a better way. Children can understand that a successful life is beyond being a good person. It also
includes being a responsible citizen. Value-based education provides a positive direction to
children to shape their future.

Needless to say, it also helps in character and personality development. It is essential for the
holistic development of a child and this is the reason why parents must focus on value-based
education.

Investment in education is important for a country’s economic growth and development.

Education increases productivity as individuals who are trained and knowledgeable will be more
efficient which leads to increased output and increased economic growth. Education is the
process of imparting knowledge, skills, beliefs and cultures to empower and influence behaviour.

The long-term returns to investments in human capital such as; on the job training, coaching,
mentoring and e learning will reduce poverty.
 International Trade

International trade can be defined ad economic transactions that are made between countries.
Among the items commonly traded are consumer goods, such as television sets and clothing;
capital goods, such as machinery; and raw materials and food. Other transactions involve
services, such as travel services and payments for foreign patents. International trade transactions
are facilitated by international financial payments, in which the private banking system and
the central banks of the trading nations play important roles.

International trade and the accompanying financial transactions are generally conducted for the
purpose of providing a nation with commodities it lacks in exchange for those that it produces in
abundance; such transactions, functioning with other economic policies, tend to improve a
nation’s standard of living. Much of the modern history of international relations concerns efforts
to promote freer trade between nations.

In simpler terms it consists of exports and imports between countries, which should cause an
improvement in people’s living standards through the principle of comparative advantage.

Comparative advantage is the idea that countries benefit from specializing in the production of
goods at which they are said to be more efficient.

It is an advantage for countries to be self-sufficient, but there are reasons why trade must take
place between nations.

Absolute Advantage

The capability to produce more of a given product using less of a given resource than a
competing entity.

For example, consider again Country A and Country B. The opportunity cost of producing 1 unit
of clothing is 2 units of food in Country A, but only 0.5 units of food in Country B. Since the
opportunity cost of producing clothing is lower in Country B than in Country A, Country B has a
comparative advantage in clothing.

Thus, even though Country A has an absolute advantage in both food and clothes, it will
specialize in food while Country B specializes clothing. The countries will then trade and each
will gain.

Absolute advantage is important, but comparative advantage is what determines what a country
will specialize in.

Reasons for International Trade

 Lack of certain natural resources to produce essential goods. Oil which is important to
economic life must be imported into countries that do not possess that natural resource.
 Lack of capital, technology and specialist labour to manufacture certain goods on a large
scale. For example, Caribbean countries import machinery equipment and vehicle.
 Differences in climatic conditions, e.g. many tropical countries import grapes and
strawberries as these produce need cool climates to survive.
 Differences in the cost of production between countries. This reason is based on the
principle of comparative advantage which states that benefits will be gained from trade if
countries produce goods in which they have a relative advantage. Therefore, if two countries
both produce cars and coffee but each is more efficient at producing or produces either at a
lower opportunity cost either car or coffee, then trade can take place. The country that is
more efficient at producing coffee should put all its resources into coffee and import cars
from the other country that is efficient in producing cars.
 To earn foreign exchange to pay for imports.
 Promotes necessary political connections between countries

Advantages of Int. Trade Disadvantages of Int. Trade

 Increase utilization of productive  Protection required by local firms

capacity for export

 Increased employment for increased  Dumping of goods by developed

output countries

 Improved standard of living due to  Underdeveloped local industries

 increased variety of goods

 Increased quality of goods due to

competition

REGIONAL AND GLOBAL BUSINESS ENVIRONMENT

Stages of Economic Integration

1. Preferential trading area – a free trade area or trading bloc giving preferential access to
goods from different countries eg. Tariffs
2. Free trade area – a group of countries eliminate barriers between each other eg. Tariffs
and quotas and may have different policies with members outside the area eg. increased
tariffs.
3. Customs Union- free trade area with a common external tariff for non-members.
4. Common Market- a Customs Union with agreeing to adhere to the same product
regulations and freedom of movement of the factors of production. This is also called the
single market when licences, entry permits and taxes have been removed from trading.
5. Economic Monetary Union – a Single Market with a common currency.
6. Complete Economic Integration- final stage of economic integration; complete merging
of policy making with group decisions made on matters concerning all member countries.