Standard of living refers to the economic well-being of an individual or a group. The idea of standard of living provides economists with a way to compare the economic well-being of people over time or across populations. A person’s standard of living is not the same as a person’s overall well-being. Standard of living concerns financial conditions. These conditions may be linked to, but they are not the same as happiness or satisfaction with life.
Measuring standard of living
Economists measure standard of living in a variety of ways. One of the most common ways is annual income.
Annual income.
Economists calculate a country’s average annual income by first determining the gross domestic product (GDP) for the country. GDP is the total market value of all final goods and services produced in an economy during a given period. Once GDP is known, economists can then determine GDP per capita (the average GDP for each person). GDP per capita is calculated by dividing a country’s GDP by its population.
Comparisons over time.
Calculating GDP allows economists to track changes in the standard of living of a population over time. When GDP grows more than the population grows, the amount of goods and services per capita increases. Generally, people are economically better off as GDP grows. If GDP falls, generally people are not doing as well economically, and their standard of living is lower.
The value of money changes over time. Consequently, economists make certain adjustments to GDP figures so that changes to GDP per capita represent real changes and not just those caused by variations in money value. GDP per capita without such adjustments is called nominal. GDP per capita with such adjustments is called real.
Comparisons across populations.
Using GDP per capita as a measure of living standards also allows for comparisons across groups. For example, economists can compare the standard of living of people in different countries. GDP is measured in currency units. The currency unit for the United States, for example, is the United States dollar. To make comparisons across countries, economists need to measure value in a common currency. To do so, they convert the value of the various currencies into the value of a single currency through the use of exchange rates. An exchange rate is the price of one nation’s currency in terms of the currency of another nation.
GDP per capita works fairly well when comparing standards of living among countries at a similar level of development. It allows, for instance, for useful comparisons between the United States and many European countries. It also works for comparisons between poor countries in less-developed areas of the world.
However, GDP per capita alone does not work as well when comparing the standard of living between industrialized countries and developing countries. The same amount of money has different purchasing power in different countries. It would purchase widely different amounts and types of goods and services in an industrialized nation than it would in a less-developed country. To account for such differences, some economic reports provide two sets of figures for comparing standards of living. They give information about both GDP per capita and GDP per capita adjusted for the purchasing power of a particular currency unit across countries. This adjustment is known as purchasing power parity (PPP). Using purchasing power parities enables economists to make more realistic comparisons of standard of living across countries. The results of calculations with PPP’s reflect real differences in price levels for goods and services.
Drawbacks.
GDP has some drawbacks as a measure of standard of living. One concern is arriving at an accurate estimate of GDP. Achieving such accuracy is especially difficult when comparing standards of living between rich, technologically developed nations and poor, mainly agricultural nations. Most families in wealthy nations purchase their food, clothing, and other goods. But many families in poorer nations grow much of their own food and generally provide much of their goods themselves. GDP measures the market value of final goods and services. Because many of the goods consumed in poorer countries are not purchased in market transactions, they are not counted in a nation’s GDP.
Another difficulty with using GDP per capita as the measure of standards of living is that it offers no information about the distribution of income. Two countries might have the same GDP per capita. However, one of them might have some extremely rich citizens and many others living in great poverty, while the other country has a population of people with similar incomes.
Other kinds of measures.
Economists sometimes use other measures for determining standard of living besides GDP per capita. Some of these measures focus on economic well-being. For example, some use estimates of consumption—rather than income—per capita. Some take into account inequality of income in a nation.
Some other measures of standard of living attempt to evaluate quality of life. For example, some measures compare the average of the highest grade of schooling people completed in various countries. However, such measures alone might not provide an accurate picture of the real educational levels of the countries. To be more accurate and useful, they would, for example, have to consider the difference in the quality of a certain number of years of schooling across countries.
Standard of living and the environment
Critics of industrialization argue that economic growth is not necessarily desirable. They argue that a rise in the standard of living driven by economic growth is linked to the harmful effects of industrialization. Industrialization, they believe, leads to greater pollution and therefore greater damage to the environment. Consequently, these critics feel that technologically advanced economies, such as that of the United States, should not strive for economic growth.
Supporters of economic growth argue that technological advances have led to more efficient production that results in less harm to the environment. They argue that industrialized nations will need to produce more over time to keep pace with population growth. If output does not grow over time, population growth will lead to a decline in the standard of living.
