Cambridge (CIE) IGCSE Your notes
Economics
5.1 Living Standards
Contents
Indicators of Living Standards
Living Standards & Income Distribution
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Indicators of Living Standards
Your notes
Real GDP Per Capita
Economic development is the sustainable increase in living standards for a country,
typically characterised by increases in life span, education levels, and income
There are many measures of living standards
Single indicators e.g. real gross domestic product/capita, number of
doctors/1000 people; infant mortality rate; % of the population with access to
clean drinking water
Composite indicators such as the Human Development Index (HDI)
The distinction between real, nominal and per capita
GDP-
In economics, the use of the word nominal refers to the fact that the metric has not been
adjusted for inflation
Nominal GDP is the actual value of all goods/services produced in an economy in a
one-year period
There has been no adjustment to the amount based on the increase in general price
levels (inflation)
Real GDP is the value of all goods/services produced in an economy in a one-year
period - and adjusted for inflation
For example, if nominal GDP is $100bn and inflation is 10% then real GDP is $90bn
Real GDP per capita = rGDP / the population
It shows the mean wealth of each citizen in a country
This makes it easier to compare standards of living between countries:
For example, Switzerland has a much higher GDP/capita than Burundi
It is useful to know the rGDP/capita, however it has the following disadvantages
It is a single indicator so provides very limited information
It is an average so there may be significant poverty in many parts of a country that
has a high rGDP/capita
Examiner Tips and Tricks
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When an exam question uses the phrase 'at constant prices' it is referring to real
GDP. For example, a question may read, 'Explain what is meant by a rise in GDP at
constant prices'. This requires you to define real GDP and then explain the rise. Your notes
The Human Development Index (HDI)
Developed by the United Nations, it is a combination of 3 indicators
1. Health, as measured by the life expectancy at birth [Link] 2019 it was 81.2 years in the UK
2. Education, as measured by a combination of the mean years of schooling that 25 year
olds have received, together with the expected years of schooling for a pre-school
child
3. Income, as measured by the real GDP
Each indicator is given equal weighting in the index
The index ranks countries on a score between 0 and 1
The closer to 1, the higher the level of economic development and the better the
standard of living
A value of < 0.550 is considered low development. E.g. Chad 0.394
A value of 0.550-0.699 is considered medium development. E.g. El Salvador 0.673
A value of 0.700-0.799 is considered high development. E.g. Thailand 0.777
A value ≥ 0.800 is considered very high development. E.g. Norway 0.957
An Evaluation of HDI
1. It is a composite indicator and includes several important indicators of living standards
2. It includes rGDP/capita which is an average - so the HDI still does not take into account
inequality in the distribution of income
3. It does not measure environmental damage or resource depletion
4. It does not take into account cultural differences or measure qualitative factors such as
happiness or equal rights
Examiner Tips and Tricks
Both MCQ and structured questions often ask you to compare or analyse the HDI and
GDP/capita of a country. On the whole, there is usually a positive relationship.
Countries with a higher HDI value usually have a higher GDP/Capita. However, look for
exceptions in the data presented - is the GDP/capita rising while the HDI is falling? If
so, one reason may be that the inequality in the country is worsening (rich getting
richer and the poor, relatively poorer).
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Living Standards & Income Distribution
Your notes
Reasons for Differences in Living Standards and
Income Distribution
There are many reasons that cause differences in living standards and the income
distribution within and between countries
1. Economic system: a mixed economy provides the highest quality of living standards.
There is much debate on how much government planning there should be. However,
countries in Scandinavia with a more mixed economic system score very highly on HDI
and living standards. With completely free markets (unchecked capitalism), wealth
inequalities increase exponentially. With planned economies, shortages abound
2. The Government: the values of a government influence their economic agenda, tax
system and government spending. Governments are more easily held accountable by
the citizens in countries with a low level of corruption
3. Corruption: significantly undermines quality of life and the standards of living
4. Tax system: most countries have a progressive tax system for corporate and personal
income tax. However, there can be many indirect taxes which completely change the
quality of life for the poorest households
5. Productivity levels: differences in skills result in difference in productivity and higher
levels of productivity are rewarded with higher wages, which leads to a better standard
of living
6. Size of the population: more densely populated countries or cities face more
challenges. A larger population can mean higher tax revenues but at the same time,
government expenditure on services is spread across more people often resulting in
less government spending/capita
7. Education levels: These directly influence productivity and wages
8. Inflation: Tends to impact poorer households more as any increase in general price
levels represents a larger absolute value of their wages when compared to wealthier
households
9. Regional differences: Many countries have historically poor areas, as well as wealthier
ones. Poverty in certain regions can be much higher
10. Personal freedoms: religious, economic, personal, political and civil freedoms improve
the quality of life within a nation
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