What is standard of Living? How is it currently measured? Is it an accurate analysis of socioeconomic conditions?
Standard of living is explained as the level of consumption of goods and services that people enjoy, on average, and the amount of consumption goods and services afforded is determined by the level of income per person.
Standard of living is currently calculated by taking real gross domestic product (GDP) and dividing it by the population which equates to the breakdown of real GDP per person. This is the most common method for comparing standard of living over various periods of time since real GDP removes factors such as rising prices and rises in the cost of living.
Since real GDP is the measure of real income, which accounts for the value of goods and services that the average person can benefit from, it can be considered the easiest measurement tool available to distinguish between various country's standard of living under the assumption that the higher the real GDP per person, then higher the standard of living. However, some feel that only using the value of consumption goods and services as factors does not provide a complete picture of socioeconomic conditions.
Limitations on Real GDP - Cause for Alternative Measures
Real GDP only measures the value of goods and services brought within markets. It fails to include certain economic transactions such as household production or underground business operations which can account for untold amounts of income, especially in developing nations.
Pollution is an example of an economic bad in which the more that is produced, the more the environment becomes polluted, and decreases standard of living, however, this is not a measure for standard of living.
Influences such as political freedom and social injustices affect standard of living because real GDP per person because a country can have the highest level of real GDP per person and at the same time the highest level of poverty.
Most Widely Accepted Alternative Measures of Standard of Living
Life expectancy varies greatly across different parts of the world. A long life expectancy is equated with higher levels of public health, medical care, and diet which stands for a better life. In contrast, countries with low life expectancy often are plagued by war and starvation.
Education as a standard of living measured in two parts. The first being "expected years of schools" which includes children at an age old enough to enter school, and secondly "mean years of schooling" which assesses continued education into adulthood. Education is used as a gauge for indication of a higher standard of living because increased knowledge allows for a shift in increased income.
Gross National Income (GNI) is the value produced by all citizens of a country based upon ownership. It is calculated by taking GDP and adding net primary income from abroad divided by the population. Proponents of GNI per person prefer this measurement to real GDP per person because it can more fairly make comparisons between countries with different population levels and standards of living allowing for less fluctuations. GNI is more commonly called Gross National Product or GNP.
Who tracks, analyzes, and reports alternative measurements of standard of living?
The Human Development Index is published by the United Nations Development Programme, and was created by Pakistani economist Mahbub ul Haq. It utilizes life expectancy at birth, education, and GNI to calculate a number and create an index in which countries are ranked with the intention of grabbing the attention of policy makers.
The main focus of the Happy Plant Index, created by the New Economics Foundation (NEF), is to measure the ecological footprint of each country. It relates sustainable development to the well being and health of each country which therefore links standard of living. However, most do not consider the HPI to be a reliable measure due to the available data on the costs of pollution and depleting resource being inaccurate.
"The mission of the Organisation for Economic Co-operation and Development (OECD) is to promote policies that will improve the economic and social well-being of people around the world." OECD is an international organization that measures "productivity and global flows of trade, and investment." It works with governments to ensure fair business practices to help restore confidence in markets.
Comparing Rankings - Real GDP vs. HDI
The top 3 countries include Qatar, Liechtenstein, and Bermuda. The bottom 3 countries include Somalia, Zimbabwe, and Congo (Democratic Republic of the.)
The top 3 countries include Norway, Australia, and the United States. The bottom 3 countries include Mozambique, Congo (Democratic Republic of the), and Niger.
While the top 3 countries from each ranking system vary due to limitations of real GDP per person and certain criticisms of HDI measurements, it is apparent that both real GDP per person and HDI are relevant indexes for reporting regions of the world that experience lower standard of living levels.