However, GDP per capita is an inadequate measure of countries’ immediate material well-being, even apart from the general practical and conceptual problems of measuring countries’ national outputs. As a tool for measuring how well we live, GDP per capita has its shortcomings. Critics expressed concern that GDP per capita failed to reflect a number of important aspects of human welfare, and pointed to some notable disparities in the ranking of countries based on GDP per capita compared with other possible indicators of well-being, such as length of life and education. Other Critics feared that if policymakers focused on GDP per capita, they would be unduly biased toward economic growth as a policy objective, rather than striving for balanced human development.
Although it leaves so much out, we still persist in using average real GDP per capita to measure standard of living. There are two reasons: (1) We have a fairly accurate idea of what it is, and (2) it’s tough to come up with quantitative measures for things like wellbeing, quality of life, and happiness
HDI (Human Development Index). A recent product of this social indictors movement has been the United Nations human development index (HDI), now reported on an annual basis (United Nations Development Program, 1999). The HDI combines GDP per capita, life expectancy at birth, and a composite measure of education based on literacy and school enrollment into an overall index number①. Some experimental work also seeks to include human rights in this broad measure of human development.
The United Nations Human Development Report 2002 ( ) lists HDI rankings for 173 countries. The top ten highest-ranked countries are listed as follows:
Nevertheless, this broader conception of the standard of living inevitably raises questions of scope and weighting that hard back to the early days of national income measurement. (Kuznets, 1941②) The HDI, for example, does not reflect political participation or gender inequalities. HDI and the other composite indices can only offer a broad proxy on the issues of human development, gender disparity, and human poverty.
GPI (Genuine Progress Indicator). The people at Redefining Progress, a nonprofit public policy organization based in northern California, maintain that GDP was never intended as “the primary scorecard of a nation’s economic health and well-being.” It is, they say, “merely a gross tally of products and services bought and sold, with no distinctions between transactions that add to well-being, and those that diminish it.” So in 1995, they developed the Genuine Progress Indicator (GPI), which they believe is “a more accurate measure of progress.”
The Redefining Progress web site, http://www.rprogress.org/, gives a ten-point comparison between GDP and GPI. Here are some of the points it covers:
- Crime and family breakdown — “Social breakdown imposes large economic costs on individuals and society, in the form of legal fees, medical expenses, damage to property, and the like. The GDP treats such expenses as additions to well-being. By contrast, the GPI subtracts the costs arising from crime and divorce.”
- Household and volunteer work — “Much of the most important work in society is done in household and community settings: child care, home repairs, volunteer work, and so on. These contributions are ignored in GDP because no money changes hands. To correct this omission, the GPI includes, among other things, the value of household work figured at the approximate cost of hiring someone to do it.”
- Income distribution — “A rising tide does not necessarily lift all boats — not if the gap between the very rich and everyone else increases. Both economic theory and common sense tell us that the poor benefit more from a given increase in their income than do the rich. Accordingly, the GPI rises when the poor receive a larger percentage of national income, and falls when their share decreases.”
- Pollution — “The GDP often counts pollution as a double gain; once when it’s created, and then again when it is cleaned up. By contrast, the GPI subtracts the costs of air and water pollution as measured by actual damage to human health and the environment.”
Engel’s Law③. We tend to equate a higher standard of living with a higher level of consumption. A growth in real income and purchasing power has provided the opportunity for greater consumption. The changes in purchasing power for employees are illustrated by the yearly consumption of basic food items. With rising incomes, the share of expenditures for food (and, by extension, other) products declines (= Engel found, based on surveys of families' budgets and expenditure patterns, that the income elasticity of demand for food was relatively low). The resulting shift in expenditures affects demand patterns and employment structures. [Engel's Law does NOT suggest that the consumption of food products remains unchanged as income increases! It suggests that consumers increase their expenditures for food products (in % terms) less than their increases in income. ]
Index of Social Health. Marc Miringoff is director of the Fordham University Institute for Innovation in Social Policy. Marque-Luisa Miringoff is a professor of sociology at Vassar College. Together, they developed the Index of Social Health, which they describe as “a broadbased gauge of the social well-being of the nation, similar in concept to the Dow Jones Average or the Gross Domestic Product.” Published annually since 1987, the index uses government data for 16 social indicators to create profiles and rankings for all 50 states. In 2001, Iowa ranked number one with a score of 73 out of 100.④
П. The Price Levels
To make a cross-country comparison of living standard, we need to express the data in a currency (nearly always the US dollar). The adjustments of standard of living can be made for variations in price levels and the average cost of living between countries by expressing the figures using estimates for PPP (Purchasing power parity)⑤. However fluctuations in the exchanged rate can affect the accuracy of the figures. And, there is no guarantee that each country measures national output and incomes with the same degree of accuracy. Let’s look at the following example and let “The Economist’s Big Mac Index” tell us their discovery.
The Big Mac Currencies “The Economist's Big Mac index” was first launched in 1986 as a gastronome’s guide to whether currencies were at their correct exchanged rate. Burgernomics is based on one of the oldest concepts in international economics: the theory of “purchasing-power parity”. This argues that the exchange rate between two currencies should in the long run move towards that rate that equalizes the prices of identical bundles of traded goods and services in each country. In another words, a dollar should buy the same amount everywhere. The “bundle” is a McDonald’s Big Mac, which is produced to more or less the same recipe in about 120 countries. The Big Mac PPP is the exchange rate that would leave hamburgers costing the same in each country. Comparing the currency’s actual exchange rate with its PPP is one test of whether the currency is undervalued or overvalued. ⑥
The Above graph shows that the average price of a Big Mac in America is $2.45 (including sales tax). The cheapest Big Macs are found in China, Malaysia, the Philippines and South Africa, and all cost less that $1.20. In another words, these countries have the most undervalued currencies, by more than 50%. The most expensive Big Macs are found in Britain, Denmark and Switzerland, which by implication have the most overvalued currencies. Pound, for example is 12% overvalued against the dollar. The most undervalued of the rich-world currencies are the Australian and New Zealand dollars, which are both 40-45% below McParity.
Overall, by eliminating price differences between countries, PPP for GDP enable better comparisons to be made of an economy's size, and living standard of its residents. In practice, however, PPPs are subject to large errors and revisions. One source of error is the culturally diverse nature of the countries for which PPPs are calculated. Such diversity makes it difficult to select a representative basket of goods and services that provides equivalent utility in each country. Moreover, PPPs provide a good indication of local purchasing power only if countries purchase their own GDP. However, countries also purchase the GDP of other countries at prices determined by the prevailing exchange rates and not PPPs. Despite their limitations, PPP adjustments make possible several useful international comparisons.
Ш. The living standards of urban and rural are different
Although we can compare countries’ standard of living in so many ways, the indexes cannot present the exactly situations between countries. There is a difference between urban and rural areas' GDP, especially in developing countries, so that it is very dangerous in believing too much in the datasets. For instance, There are 32.1% per 1000 population (about 900 million) living in rural, where the average annual income is 2,200 Yuan [$267] and more than 30 million farmers live below the official poverty line. The graph at the left shows growing income rent from 1978 to 1998 between urban and rural in China. We can find from the graph that the average urban income increased doubled than the average rural income. However, people in big cities like Shanghai, are making US$3000 per annual. It means that there are many very poor people in the countryside, people who earn much less than $267.
Every country has some undeveloped areas and highest ranked areas. When comparing the standard of living between countries, it is difficult to define whether this country’s living standard is higher than another country or not. The standard of living in some parts of one country may be much higher than another. Nevertheless, the whole country’s standard of living may be lower than the competitor.
Concluding Observations
One of the difficulties in comparing the standard of living between counties is that there are so many standard-of-living yardsticks including GDP per capita, however, none of them can include all the variables. Different options have their own benefits. For example, GDP is measure of change in material well-being. HDI offers a global perspective on the question of how well people are living. GPI redefines the progress of nation’s economic health and well-being. The Engel’s Law measures the standard of living though food demand. Last but not least, the Index of Social Health emphasizes on people’s mental health. In comparing the standard of living, we need to concern about the price levels, the currencies may be overvalued, in another word; the countries do not measure national output and incomes with the same degree of accuracy. Last but not the least, there is a big gap between urban and rural in developing countries, if only believe in numbers, it will be dangerous that you will avoid the undeveloped part of your own country.
Reference:
① Human Development Report, 2003, FAQs on the Human Development Indices, “What is the human development index (HDI)?”, [accessed September 15,2003]. The HDI – human development index – is a summary composite index that measures a country's average achievements in three basic aspects of human development: longevity, knowledge, and a decent standard of living. Longevity is measured by life expectancy at birth; knowledge is measured by a combination of the adult literacy rate and the combined primary, secondary, and tertiary gross enrolment ratio; and standard of living by GDP per capita (PPP US$). For details on how to calculate the HDI, .
② Kuznets, Simon. 1941 “National Income and Its Composition”, 1919-1938. New York: National Bureau of Economic Research.
③ Ernst Engel, a [19th century] German statistician.
④ The Ledger: Winter 2003, “How do We measure Standard of Living”, [accessed September 16, 2003]
⑤Pocket World in Figures, 2001, The Economist Books Ltd. PPP statistics adjust for cost of living differences by replacing normal exchange rate with rates designed to equalize the prices of a standard “basket” of goods and services. These are used to obtain PPP estimates are normally shown on a scale of 1 to 100, taking the United States as 100.
⑥ Big Mac Currencies, April 21st, The Economist print edition