Standard of living refers to the social and economic well-being of individuals in a country at a particular point in time.

Two main measures of living standards which are Real GDP per capita and Human development Index (HDI).

Real GDP Per capita is a measure of the average income per person. If real GDP grows but the population increases at a faster rate than average income per head will fall, higher GDP means that people have more to spend on goods & services. One of the problem of using real GDP to measure standards of living is that the size of population is ignored. Another problem with GDP is Inflation. This erodes the value of GDP because the value of money falls if there is inflation.

Though, the real GDP per capita stands as a measure of real GDP but it has its own deficiencies which are:

  • not considering how income is distributed (a few very rich people can skew the average upwards)
  • not considering what people can buy (the availability of goods and services may be poor)
  • not considering the quality of and access to education, health care, clean water and sanitation
  • not considering the impact of growth on the natural environment

Human Development Index (HDI) is composite in nature as a measure for indicating living standards. It has three dimensions which are:

  1. Healthcare: This indicates the quality of and access to basic health care in a country. the better the health care, the greater the social and economic well being citizens tend to enjoy in the country.
  2. Education: This indicates the level of education acquired in the country. The higher the average years of schooling, the greater the degree of human development.
  3. Income levels: The higher the GDP of the country, the greater the human development.

Though the HDI is a better indicator of measuring standard of living, it also has its own failings which are:

  • not considering the qualitative factors affecting living standards such as gender inequalities, human rights
  • not considering the uneven income distribution in the economy
  • not considering environmental and resource depletion as a result of economic growth.
  • not considering cultural differences.

Factors influencing differences between Living standards & Income Distribution

  • Productivity levels: A relative low productivity level will result in low wages and earnings and will enjoy lower standard of living and vice versa.
  • Size of Population: The size directly impacts on the standard of living. Large concentrated cities tend to have expensive rents due to limited space and high demand which will result in higher living cost.
  • General Price level: an increase in cost of price would impact the living standards negatively which might lead to economic instability.