Measuring Living Standards and Economic Well-Being

EdExcel AS Economics 2.1.1

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

Countries with the highest per capita GDP in 2015

LuxembourgSwitzerland

QatarNorway

United StatesIceland

SingaporeDenmarkAustraliaSweden

San MarinoIrelandCanadaAustria

Netherlands

0 20000 40000 60000 80000 100000 12000096,268.65

84,069.7981,602.85

80,748.956,421.39

54,331.453,604.15

52,821.7952,454.12

49,582.1249,139.01

47,329.0545,028.9344,475.5944,249.48

GDP per capita in U.S. dollars

Text goes herGDP per capita = GDP / total population expressed in a common currency

Source: IMF

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

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

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)

2007 Q1

2007 Q2

2007 Q3

2007 Q4

2008 Q1

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

2010 Q2

2010 Q3

2010 Q4

2011 Q1

2011 Q2

2011 Q3

2011 Q4

2012 Q1

2012 Q2

2012 Q3

2012 Q4

2013 Q1

2013 Q2

2013 Q3

2013 Q4

2014 Q1

2014 Q2

2014 Q3

90

92

94

96

98

100

102

104

106

GDP per Capita RHDI Per Capita

Index numbers, 2008Q1 = 100

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

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

• 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

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

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

Societal Well-Being is a Broad Concept

Wellbeing

Quality of life

Happiness

Life satisfaction

Welfare

Sustainability

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

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

Data on Income Satisfaction in the UK from 2006-2012Satisfaction 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?

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

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

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.

Measuring Living Standards and Economic Well-Being

EdExcel AS Economics 2.1.1