Living Standards

1. Measuring Living Standards and
Economic Well-Being
EdExcel AS Economics 2.1.1

2. Measuring National Income Per Capita
• Per capita means
income per head of
population
• = GDP / total population
Per capita
income
• In many countries,
official population data
is inaccurate
• There has been a sharp
rise in migrant flows
Population
estimates
• UK pop is projected to
increase by 9.6 million
over the next 25 years
• Projected UK pop to
reach 70 million in 2027
UK
Population
Forecast
Year (Mid
Year Figure)
UK
Population
(Millions)
1980 56.3
1990 57.2
2000 58.9
2005 60.2
2010 62.3
2013 63.6

3. Countries with the highest per capita GDP in 2015
96,268.65
84,069.79
81,602.85
80,748.9
56,421.39
54,331.4
53,604.15
52,821.79
52,454.12
49,582.12
49,139.01
47,329.05
45,028.93
44,475.59
44,249.48
0 20000 40000 60000 80000 100000 120000
Luxembourg
Switzerland
Qatar
Norway
United States
Iceland
Singapore
Denmark
Australia
Sweden
San Marino
Ireland
Canada
Austria
Netherlands
GDP per capita in U.S. dollars
Text goes herGDP per capita = GDP / total population expressed in a common currency
Source: IMF

4. Examples of Inaccuracies when Calculating GDP
Published national income data is subject to errors in measurement
• GDP understates real national income per capita due to the
shadow economy and the value of unpaid work by
volunteers and people caring for their family. On one
estimate, charities added £24bn or 1.7 per cent to 2009 GDP
• The "shadow economy" includes illegal activities such as
drug production and distribution, prostitution, theft, fraud
and concealed legal activities such as tax evasion on
otherwise-legitimate business activities such as un-reported
self-employment income
• Often official GDP data is inaccurate as many lower income
countries do not update their reporting often enough, so
their GDP numbers may miss large and fast-growing
economic sectors, like mobile telecommunications

5. Sex, Drugs and GDP
In 2014 the UK started the process of including estimates of
incomes and spending from the shadow economy in the GDP figure
• According to draft estimates, sex work generated £5.3bn
for the British economy in 2013
• £4.4bn came from the sale of cannabis, heroin, powder
cocaine, crack cocaine, ecstasy and amphetamines
• It was estimated that there were 2.2 million cannabis
users in the UK in 2009, growing cannabis worth more
than £1.2bn. Half of that was home-grown – costing
£154m in heat, light and "raw materials" to produce

6. What has happened to Living Standards in the UK?
There are two measures of living standards shown here – real GDP per
capita and also real household disposable income (RHDI)
90
92
94
96
98
100
102
104
106
2007
Q1
Q2 2008
Q1
Q2 2009
Q1
Q1 2010
Q1
Q1 2011
Q1
Q4 2012
Q1
Q4 2013
Q1
Q3 2014
Q1
Q3 2015
Q1
GDP per Capita RHDI Per Capita
Index numbers, 2008Q1 = 100

7. Flaws in GDP as a measure of the Standard of Living
The main indicator for standard of living is real GNI per capita
(adjusted for purchasing power parity) – but this data hides........
1. Regional variations in income and spending and employment
2. Inequalities in income and wealth between households
3. Changes in leisure and working hours and working conditions
4. Imbalances between consumption and investment
5. GDP struggles to measure accurately knowledge innovation sectors
6. Changes in years of healthy life expectancy
7. The value of non-marketed output and unpaid work
8. Innovation and the development of new goods and services
9. The impact of economic growth on the stock of natural resources
10. Defensive expenditures – e.g. money spent protecting against crime, or
cleaning up the effects of pollution and waste adds to published GDP

8. Regional Economic Data: Disposable Income Per Head
Gross Household Disposable
Income, £ per head in 2013
United Kingdom 17,559
North East 14,927
North West 15,412
Yorkshire and The Humber 15,252
East Midlands 15,893
West Midlands 15,551
East of England 18,523
London 22,516
South East 19,898
South West 17,693
England 17,842
Wales 15,413
Scotland 17,039
Northern Ireland 14,347
There are large
differences in
disposable income
per household in the
United Kingdom.
In 2013 London had
the highest GDHI per
head, where the
average person had
£22,516 available to
save or spend.
Northern Ireland had
the lowest, with the
average person
having £14,347

9. • Average living standards decline (falling per capita incomes)
• More workers need a second job to supplement their
incomes – now more than 1 million people with second jobs
• Less consumer demand for goods & services
• Reduced incomes per capita may cause GDP growth to remain
slow – making the recovery more fragile
• Lower incomes and low net savings makes many more people
reliant on (expensive) consumer debt e.g. pay day loans
• Becomes much harder for people to reduce the debts
accumulated during the growth years including mortgages
• The government receives lower-than-expected tax revenues
– making it harder to reduce the size of the UK fiscal deficit
Economic Effects of a Fall in Real GDP Per Capita

10. Economic Growth & Economic Welfare
Sustained growth
of real GDP over
time
Contributes to
rising living
standards
Long run increase
in a country’s
productive
potential
Economic
growth A broader
measure of well-
being (social +
economic)
Many aspects of
well-being are
not material
aspects of life
Welfare measure
might include
inequality +
median incomes
Economic
welfare

11. National Happiness (Economic Well-Being)
GDP as the traditional yardstick for measuring living standards has come
under pressure. Economic well-being is a multi-dimensional concept.
Real Gross Domestic Product per capita
Real Household Spending per head
Median Household Income
Household Net Wealth (i.e. value of assets – liabilities)
Unemployment rate (household income and net wealth.
Financial situation of households + feeling of security

12. Societal Well-Being is a Broad Concept
Wellbeing
Quality of life
Happiness
Life
satisfaction
Welfare
Sustainability

13. Links between real incomes and subjective happiness
• Traditional economic theory assumed a positive
relationship between income and happiness
• Standards measures of progress such as GDP are
increasingly considered an incomplete picture of
the state of the nation
• Plenty of evidence that happiness does not
increase beyond a certain income threshold
• The Easterlin Paradox emerged in the 1970s
• The Easterlin Paradox concerns whether we are
happier and more contented as our living
standards improve

14. The Easterlin Paradox
1. Within a society, rich people tend to be much
happier than poor people.
2. But, rich societies tend not to be happier than poor
societies (or not by much).
3. As countries get richer, they do not get happier.
• Easterlin argued that life satisfaction does rise with
average incomes but only up to a point. Beyond that
the marginal gain in happiness declines.
• One of Easterlin’s conclusions was that relative
income can weigh heavily on people’s minds.
• Faced with this choice what would you rather have?
– You get £5,000 and a friend gets £3,000 or
– You get £10,000 and a friend gets £15,000

15. Data on Income Satisfaction in the UK from 2006-2012
Satisfaction with current
income (per cent of responses)
2006 2007 2008 2009 2010 2011 2012
Completely satisfied 9.7 9.6 8.5 8.6 9.3 7.0 8.7
Mostly satisfied 20.7 22.4 20.4 28.7 28.6 26.7 27.9
Somewhat satisfied 28.0 28.2 29.5 19.9 19.4 18.9 16.9
Neither satisfied nor dissatisfied 20.2 20.1 20.8 14.1 13.7 13.3 13.5
Somewhat dissatisfied 12.0 11.3 11.9 14.8 15.1 16.2 15.3
Mostly dissatisfied 5.6 5.2 5.3 8.1 8.3 11.8 11.1
Completely dissatisfied 3.7 3.2 3.6 5.8 5.6 6.1 6.7
Somewhat, mostly or completely
satisfied
58.4 60.2 58.5 57.2 57.3 52.6 53.4
To what extent has the recession and subsequent slow recovery in the UK
had an effect on measured economic well-being?

16. Problems with using GDP to measure Living Standards
Quality of Life
Human Happiness
Non-Market Activities
Voluntary Activities
Environmental Factors
Externalities
Informal Economy
Shadow Markets
The Long Run View
Growth Sustainability
Balance of spending
Make up of GDP

17. Living Standards: Alternatives to Real GNI Per Capita
Many other indicators and surveys are now available taking in
economic, social, humanitarian and environmental aspects
Happy Planet Index Genuine Progress Indicator
OECD Better Life Index Human Development Index

18. Some Strategies to Improve Living Standards
Improving human
capital
Incentives to increase
employment
A living wage to boost
productivity
Accessible + high
quality public services
Better / affordable
housing to rent & buy
Wealth from
successful businesses
Living standards improve when an economy is able to sustain a rise in real
per capita incomes and when the benefits of growth are widely spread.

19. Measuring Living Standards and
Economic Well-Being
EdExcel AS Economics 2.1.1