5.

1 – Living Standards
Living standards or standards of living refer to all the factors
that contribute to a person’s well-being and happiness
Measuring Living Standards
 GDP per head/capita: this measures the average income per person in
an economy.
Real GDP per capita = Real GDP / Population
Merits of using GDP per capita to measure living standards:

 GDP is a useful measure of the total production taking place in the

country, and so indicates the material well-being of the economy
 it also takes population into consideration, adding emphasis on the goods
and services available to individuals
 since it is calculated on output, is a good indicator of the jobs being
created
 GDP data is readily available so is population data

Limitations of using GDP per capita to measure living standards:

 it takes no account of what people can buy using their incomes. A
country with a high GDP per head may be no better off than a country
with a low GDP per head, if there are far fewer products to choose from
 similarly, GDP doesn’t consider changes in technology that can
have a large impact on living standards. People might have had
more income in the last decade but they couldn’t benefit from all the
technology available today
 distribution of income is very unequal in reality, so the GDP per
head isn’t accurate. Some people might be very rich while others very
poor, but the GDP per head will only give the average incomes
 real GDP excludes the unpaid work people do for charities and
voluntary organizations etc. Thus, it understates the total output
 GDP also doesn’t differentiate between the positive and negative
values economies place on different output/expenditure. For
example, if the output rises because the sales of tobacco, alcohol or
pornographic materials, it might show in the records as a rise in GDP per
head but might not actually make people better off. Similarly, GDP might
rise if the government has to rebuild after a natural disaster, which
doesn’t mean living standards have risen
 the official GDP figures can be overstated due to technical errors or by
political manipulation to look good, and give a wrong picture of living
standards
 this measure doesn’t consider leisure activities, health and education
levels, environmental quality- all that determines people’s
happiness and well-being
 in order to effectively compare GDP per head across countries, they need
to be converted to a common currency and adjusted for differing
purchasing power in different countries
 comparing GDP per head can also be unreliable as GDP accounting
methods can be different for different countries.

 Human Development Index (HDI): used by the United Nations to

compare living standards across the globe, the HDI combines different
measures into one to give a HDI value from 0 (lowest) to 1(highest).
These are:
 Income index, measured using the average national income – GNI
per head adjusted for differences in exchange rate and prices in
different countries (purchasing power parity)
 Education index, measured by how many years on average, a person
aged 25 will have spent on education (mean years of schooling) and
how many years a young child entering school can now be expected to
spend in education in his entire life (expected years of schooling)
 Healthcare index: measured by average life expectancy at birth
The benefits of using HDI to measure living standards:

 it takes into account some major indicators of living standards

 recognises that it is not just output or income that determines living
standards, but also social factors
 it is a useful method to compare global living standards– it shows
clear patterns of living standards
 it is very useful and reliable measure since its produced by the UN and
is thus also widely used and recognised
The limitations of HDI to compare living standards:


 it combines a set of separate indicators into one, so a country
with good literacy rates and living standards but poor life expectancy
can have a low HDI value
 there are wide divergences in HDI within countries
 GNI per head doesn’t say anything about inequalities in
income and wealth within countries
 it doesn’t consider other factors such as environmental quality,
access to safe drinking water, political freedom, crime rates etc. which
are also important indicators of living standards
 the HDI information for all countries may not be available such
as war-struck countries where civilisation has been disrupted
In the 2019 HDI index published by the UN, Norway comes first with an
HDI index of 0.954 while Niger comes last with an index of just 0.377
owing to very low levels of education and GNI per head. See the full list
 at [Link]
ranking

Reasons for differences in living standards and income distribution within

and between countries

These have been discussed above in the merits and limitations of using
GDP per capita and HDI. More will be discussed in the coming chapters.
Some other reasons are discussed below

Difference in living Standards within a country: there can be

variations in living standards within a country. An excellent example of
this is the high living standards of the Indian state of Kerala (where IGCSE
AID is based!) which has a HDI index of 0.779 while the poorest state of
Bihar stands at 0.567 (2018).

 Regional variances in income and consumption

 Major type of sectors/jobs: manufacturing and services heavy regions
will have higher incomes, education and health services compared to
agricultural regions
 Local government provisions of education and health
Difference in living Standards between countries:
 Productivity of industries: more productive industries yield more
output and incomes
 Major industries: what makes countries like Qatar and Norway achieve
some of the world’s highest per capita incomes is that their income
comes mostly from petroleum industries that are scare and highly
demanded internationally
 Population: dense population lower per capita income and put pressure
on scarce resource
 Ability of citizens pay taxes: higher tax-base and taxable incomes
allow governments to invest in infrastructure and welfare programmes
 Provision of health and educational facilities
 Variety of goods/services produced: if citizens can choose from a
wide variety of products, living standards rise. Western countries like US
enjoy this
 War, crime and natural disasters: war-struck countries of Asia, the
high crime rates of Latin America and frequent natural disasters in island
countries, drive down their living standards as they damage infrastructure
and put people into hardship

5.2 – Poverty
Absolute poverty: the inability to afford basic necessities needed to live
(food, water, education, health care and shelter). This is measured by the
 number of people living below a certain income threshold (called a
poverty line).
Relative poverty: the condition of having fewer resources than others in
the same society. It is measured by the extent to which a person’s or
household’s financial resources fall below the average income level in the
economy. Relative poverty is basically a measurement of income
inequality since a high relative poverty should indicate a higher income
inequality.
Causes of poverty
 Unemployment: when people are unemployed and have to go without
income for a long time, they may end up having to sell their possessions,
consume less and go and into poverty.
 Low education levels: this means that people are uneducated,
unskilled and unable to find better jobs, keeping them in poverty.
 The size of family: more family members with only a few people
earning, means more costs of living, pulling the family into poverty if
they’re not earning much.
 Age: older people are likely to have more health problems and be less
suitable for further employment, causing poverty. Young people are still
employable and may find ways to earn an income.
 Poor government support for basic services.
 Poor health: ill mental and physical health is both a cause and result of
poverty.
 Overpopulation: high population density will put pressure on scarce
resource and the economy may not be able to produce and provide for
everyone, causing poverty.
 Minority group/ethnicity/migrants: will face discrimination from
bureaucrats, employers and the society at large and so won’t be able to
access and enjoy all services. E.g.: African-Americans in the US tend to be
poorer than their white counterparts.
 Gender: women usually face discrimination, especially in employment
and end up being poorer than men.
Policies to alleviate poverty
 Introduce measures to reduce unemployment: an expansionary
fiscal/monetary policy will increase aggregate demand and increase
employment opportunities. Income and standards of living will rise.
 Impose progressive taxes: income taxes are progressive, that is, they
increase as income increases. Imposing these will mean that people on
higher incomes will pay a large percentage of their incomes as tax and
help reduce relative poverty.
 Introduce welfare services: money from taxes can be provided as
income support to people with very low incomes. It can also be used to
provide free or low-cost homes, healthcare and education.
 Introduce minimum wage legislation to raise the wage of low-paid
employees.
 Increase the quantity and quality of education.
 Attract and invite inward investments from firms abroad to provide jobs
and incomes for people.
 Overseas aid could be gained from foreign governments and aid
agencies. This will include food aid, financial aid, technological aid, loans
and debt relief.
5.3 – Population

Population is the total number of people inhabiting a specific area. Two-

hundred years ago, the world population was just over a billion, now it is
about 7.7 billion, with China and India having populations above 1 billion
each! It is projected to hit 10 billion by 2056.
Factors that affect population

 Birth rates: the average number of children born in a country each year
compared to the total population of an economy is known as the birth
rate. This is usually expressed as the number of births for every 1000
people in the population.
Why do different countries have different birth rates?
 Living standards: improved quality and availability of food, housing,
clean water and medical care result in fewer babies dying. Countries
where children often die due to poor living standards have higher birth
rates (people have more children fearing that some of their children
might die. These children can then work to produce food and earn
incomes).
 Contraception: increased use of contraception and legalisation of
abortion have reduced birth rates in developed countries.
 Customs and religion: many religious beliefs don’t allow the use of
contraceptive pills, so birth rates in those communities rise. In
developed economies it is now less fashionable to have large families,
so birth rates have fallen.
 Changes in female employment: more females in developed
countries entering the labour force has resulted in falling birth rates
since they do not want motherhood to affect their careers.
 Marriage: in developed countries, people are tending to marry later in
life, so birth rates have reduced.
 Death rates: the number of people who die each year compared to
every 1000 people of the population is the death rate of an economy.
Reasons for differing death rates in different economies:
 Living standards: just as birth rates, death rates also tend to be very
high in less-developed economies due to lack of good-quality food,
shelter and medical care. Malnutrition remains the major cause of high
death rates in these countries. In developed countries, the major
causes of death include lifestyle diseases, mostly caused by unhealthy
diets.
  Medical advances and heath care: lack of medical care and
infrastructure in less-developed countries continue to be a cause for
high death rates.
 Natural disasters and wars: hurricanes, floods, earthquakes and
famine due to lack of rain and poor harvests, and wars and civil
conflicts increase death rates.
 Net Migration: migration refers to the number of people entering
(immigration) and leaving (emigration) the country. Net
migration measures the difference between the immigration and
emigration to and from an economy. A net inward migration will
increase the working population of the economy, but can put pressure on
governments finances as demand for housing, education and welfare
increase. A net outward migration may increase the income per capita
(if the emigrants send money to families back home) and thus the HDI,
but can result in loss of skilled workers.
Reasons for differing net migration in different economies:
 Living standards: people move to countries where living standards
are high which they can benefit from.
 Employment/wages: people migrate mainly to seek better job
opportunities. Widespread unemployment and low wages in the home
country will cause people to move to countries with better
employment opportunities and higher wages.
 Climate: very cold or very warm countries/regions will face more
emigration than other countries.
Population structure

The structure of a population can be analyzed using:

 Age distribution: the number of people in each age-group.

Falling birth and death rates mean that the average age in developed
countries are rising whereas in developing and less-developed
economies, high death and birth rates result in low average ages. The
median age in developed Monaco is highest at 53.1 while in under-
developed Niger it is just 15.3. Dependency ratio is the ratio of the
dependent population (those outside the labour force – children and
senior citizens – who depend on the labour force to supply them with
goods and services by paying taxes) to the total population in an
economy. A high dependency population, such as in Japan, put pressure
on the government to increase taxes rates in order to raise more revenue
to support the dependents, putting pressure on the labour force.
Consequences of an ageing population:
 The workforce will decline and there will be much dependence on the
tax-paying population to fund the welfare of old people.
 Increase in demand for products for old people including healthcare.
 The government will have to spend more on housing, old age welfare
schemes etc.
  Old people are less mobile and so the economy will be slow to adapt to
new technologies.
 Gender distribution: the balance of males and females. The sex ratio
measures the no. of males to the no. of females (the global sex ratio is
101:100; while Arab countries have sex ratios as high as 2.87, island
countries register low sex ratios). Since the average female lives longer
than the average male, there are more females in the older age-groups
than males. Gender imbalance is an excess of males or females and is
caused by
 Wars killing many young males
 Violence towards females (honour killings, rapes)
 Sex-specific immigration – more males immigrate to a country looking
for work
Consequences of changes in the gender distribution:
 having more females will encourage birth rates to rise and increase
population growth
 more females in employment will increase productivity
 more females in education and employment will increase living
standards
 a more balanced gender distribution can aid better social equality as
social attitudes towards women in education and employment become
progressive
Population pyramids display the age and gender distribution of an
economy. The vertical axes show the age groups and the horizontal axes
show the gender groups- males on the left and females on the right.
 Geographic distribution: where people live. 90% of the world
population live in developing countries. This puts a lot of pressure on
scarce resources in these countries. About half of the world population
live in urban areas, and this continues to rise, which has helped increase
production and living standards but resulted in rapid consumption of
natural resources and high levels of pollution and congestion.
 Occupational distribution: what jobs people work in. In developed
economies, more people work in the service sector while in less-
developed economies, most people work in agriculture. In developing
economies, there is a huge migration of workers from primary production
to manufacturing and service sectors. Female employment and self-
employment are also rising, which will add to production and higher living
standards.
An optimal population is one where the output of goods and
services per head of the population is maximised. An economy is
underpopulated when it does not have enough labour to make the best
use of its resources; and it is overpopulated when the population is too
large given the resources it has.
Effects of increasing population size
 Increases size of the home market and thus potential for increase in
aggregate demand in the long-run.
 Higher demand and incomes will lead to more economic growth and
expansion.
 Increased supply of labour.
 Puts more pressure on already scarce resources, especially land.
 More capital goods will have to be produced to sustain and satisfy the
needs and wants of the enlarged population.
 Fall in rate of productivity in line with the law of diminishing returns –
too many people working on limited resources means low productivity.
 Shift of employment and output from the primary sector towards
the services sector because land for primary activities is fixed, but
want for services is practically infinite as population grows, and the
emergence of mechanisation and technologies will force people out of the
primary sector.
 Congestion of urban centres: as population and incomes rise, people
will move to cities and towns which will become crowded. There will be
need for heavy transport, communications, housing, waste management
infrastructure spending.

5.4 – Developed and Less-

developed Economies

Economic development refers to the increase in the economic welfare

of people through growth in productive scale and wealth of an economy.
 Governments aim for their countries to expand from developing
economies to developed economies.
Developed countries are characterised by high GDP per capita, high life
expectancy, high literacy rate, a stable or dwindling population growth,
excellent infrastructure, high levels of foreign investments, excellent
healthcare, high productivity, and a relatively large tertiary sector.
Example: Japan
Under-developed economies or less-developed economies are
characterised by very low GDP per capita, high population growth, poor
infrastructure, healthcare and education, low literacy rates, low levels of
foreign investments, poor productivity, and a relatively large primary
sector.
Example: Somalia
Developing economies are countries that are becoming more
developed through expansion of the industrial sector and fewer people
suffering the extremes of poverty. They may attract high levels of foreign
investments and will be undergoing major economic shifts towards the
tertiary sector. However they may still have a low standard of living,
owing to high population growth. Example: India
The reasons for low economic development
 Over-dependence on agriculture: farming is the most common work
in less-developed economies. Most people work to feed themselves and
their families and sell off any surplus. This means that there is little or no
trade happening , which results in poor incomes, no economic growth or
development.
 Domination of international trade by developed economies: the
more wealthier developed economies have exploited poorer countries by
buying up their natural resources at low prices and selling products made
from them in international markets at higher prices. Rich countries also
protect their industries by paying subsidies to domestic producers,
increasing global supply, and in turn, lowering prices. Poor economies
cannot compete with these very low prices, and they lose their jobs and
incomes.
 Low levels of savings because of low incomes and widespread poverty.
 Lack of capital: low incomes in under-developed economies lead to a
lack of savings that could be invested in industries.
 Poor investment in infrastructure: good infrastructure in transport,
health and education is essential for growth and development.
 High population growth: rapidly expanding populations (due to high
birth rates) in less-developed countries will reduce the real GDP/income
per head.
 Wars and conflicts deplete resources: there is little scope for
development when the country is a war zone.
 Corrupt and/or unstable governments: causes neglect of economy
and citizens’ welfare
The opposites are true for developed economies.
Some development indicators that are used to measure how
developed an economy are: GDP per capita, population living on less than
$1 a day, life expectancy at birth, adult literacy rate, access to safe water
supplies and sanitation, proportion of workers in different sectors of
production etc.