32. Living Standards

1. Economic Growth vs. Economic Development

• Economic Growth refers to the quantitative increase in the output of goods and services in an economy over time. It is typically measured by real GDP or GDP per capita.
• Economic Development is a qualitative measure that encompasses improvement in living standards, education, health care, income distribution, infrastructure, and the reduction of poverty and unemployment.
• While economic growth may lead to development, it is not guaranteed. Development focuses on people’s well-being, not just income levels.

Example: A country may show economic growth due to resource exports but still have poor healthcare and high poverty, hence low development.

2. Gross Domestic Product (GDP)

• GDP is the total monetary value of all goods and services produced within a country’s borders during a specific period.
• It is the most commonly used measure to assess a country’s economic performance.

Types of GDP:

• Nominal GDP: Measured using current prices without adjusting for inflation. It can be misleading in high-inflation environments.
• Real GDP: Adjusted for inflation to reflect the true growth in output. Provides a more accurate picture of economic growth.

Importance of GDP:

• Helps governments and policymakers assess economic health.
• Assists in comparing the economies of different countries.
• Used to calculate GDP per capita and track growth trends.

3. GDP Per Capita

• GDP per capita = GDP / Population
• It represents the average economic output per person and is a more accurate measure of standard of living than total GDP.
• A higher GDP per capita usually indicates:
• More income and consumer choices.
• Better access to goods, services, healthcare, and education.

Limitation: It does not reflect income distribution. A high GDP per capita could hide severe inequality.

4. Components of GDP

GDP is composed of four major components:

1. Private Consumption Expenditure (C):

• • Expenditure by households on goods and services.
  • Includes consumer durables (TVs, refrigerators), non-durables (food, fuel), and services (education, healthcare).
  • Reflects consumer confidence and economic health.

2. Investment Expenditure (I):

• Business investments in capital goods (machinery, tools, buildings).
• Includes residential construction and inventory changes.
• Drives future productive capacity and economic growth.

3. Government Purchases of Goods and Services (G):

• Government spending on public services like defense, education, roads, etc.
• Includes salaries of public servants and infrastructure investments.
• Vital for stimulating demand and providing social goods.

4. Net Exports (X – M):

• • The value of a country’s exports minus its imports.
  • A positive balance (trade surplus) adds to GDP; a negative one (trade deficit) subtracts from it.

GDP Formula: GDP = C + I + G + (X – M)

5. Limitations of GDP as a Measure of Living Standards

Despite its widespread use, GDP has significant limitations:

• Ignores Non-Market Transactions: Household labor, volunteering, and informal economy aren’t counted.
• Overlooks Inequality: GDP does not show income or wealth distribution.
• No Environmental Consideration: Fails to account for pollution, resource depletion, or environmental degradation.
• Ignores Sustainability: Doesn’t indicate whether growth can be maintained over time.
• Doesn’t Differentiate Capital Formation: Treats repair and replacement as new capital.

6. Human Development Index (HDI)

HDI is a composite index developed by the United Nations to measure a country’s level of human development beyond income.

HDI Components:

• Health: Measured by life expectancy at birth.
• Education: Measured by mean years of schooling and expected years of schooling.
• Standard of Living: Measured by GNI (Gross National Income) per capita.

Advantages:

• Broader perspective than GDP.
• Helps compare global development levels.
• Encourages focus on education and healthcare improvements.

Criticisms:

• Some data, especially from developing countries, may be unreliable.
• Does not reflect inequality within a country.
• Lacks specificity about access to education or healthcare.

7. Other Measures of Living Standards

a. Gender Inequality Index (GII):

• Measures disparities in reproductive health, empowerment (education, political representation), and labor market participation between men and women.
• A higher GII indicates more inequality.

b. Genuine Progress Indicator (GPI):

• A more inclusive measure than GDP.
• Includes economic, social, and environmental factors.
• Deducts negative factors like crime, pollution, and income inequality.
• Emphasizes quality of life over just economic transactions.

c. Happy Life Expectancy (HLE):

• Combines life expectancy with happiness ratings (0–1 scale).
• Aims to evaluate how long and how happily people live.

d. Gross National Happiness (GNH):

• Introduced by Bhutan.
• Focuses on psychological well-being, culture, governance, environment, and health.
• Uses 33 indicators in 9 domains.
• Represents a holistic and sustainable approach to development.

8. Purchasing Power Parity (PPP) and Living Standard Differences

Purchasing Power Parity (PPP):

• A theory that exchange rates should equalize the price of identical goods/services across countries.
• Adjusts GDP figures to account for cost-of-living differences.
• Helps compare real value of money between nations.

Example: A Big Mac may cost $5 in the US but only $2 in India. PPP allows for adjusting GDP to reflect this price variation.

Reasons for Differences in Living Standards:

• Income levels and wealth distribution
• Access to education and job opportunities
• Health infrastructure and public services
• Skill levels and labor market structure
• Cultural values and social norms
• Amount of physical and human capital
• Type of economy (agrarian vs. industrial)
• Quality of governance and institutions