What you need to know...
GDP per capita
- GDP measures annual economic output — the total value of new goods and services produced within a country’s borders.
- Real GDP is the inflation-adjusted value.
- Average GDP per capita tells us how big each person’s share of GDP would be if we were to divide the total into equal portions.
Problems with this method?
1. Unpaid work —Real GDP per capita doesn’t acknowledge the value of housework, in-home child care, in-home elder care, volunteer work, and community service.
2. Distribution of wealth — There’s always the possibility that a large share of the gains in real GDP per capita will go to a relatively small percentage of the population. In the past increases in GDP were also more likely to be unequally distributed along gender, racial, and ethnic lines.
3. Changes in the quality of life — Real GDP per capita doesn’t fully account for the value of things like clean air, clean water, more leisure time, and increased life expectancy; nor does it fully account for the cost of such undesirable changes as increased traffic congestion or loss of open space.
Household income & wealth
- Living standards can also be measured by looking at household income and wealth
- Many economists argue that growth in median household incomes provides a better measure of how the standard of living has changed over time
- The median household income is the income of what would be the middle household, if all households in the UK were sorted in a list from poorest to richest
- As it represents the middle of the income distribution, the median household income provides a good indication of the standard of living of the “typical” household in terms of income.
- It follows that higher household income and wealth will mean higher standards of living because individuals and families will be to afford the goods and services deemed necessary for an acceptable standard of living
How else can we measure standards of living?
- There is no one measure of standards of living
- Other than using GDP per capita and Household income and wealth, what other indicators could be used to measure standards of living? (look at the image opposite for inspiration!)
Income growth versus Inflation = Inflation wins!!!
- Whilst average household incomes can grow, it does not always mean that standards of living increase; indeed high rates of inflation (a general rise in the prices of goods and services) can counteract any increases in income (read below!)
- The average annual earnings of full-time workers in the UK rose by 1.4% to £26,500 in the year to April 2012.
- There was a cut in the real value of pay, however, as inflation was higher during the same period, at 3.5%.
- Also the ONS data also reveals that inflation has outstripped the rise in average pay for the past 12 years.
- The survey results show that since April 2000, average annual pay for full-time workers has risen by 40%, from £18,848 to £26,500.
- In that time, inflation, as measured by changes in the retail prices index, has gone up by 43%.
- However, this trend has accelerated in the past five years since the onset of the international banking and financial crisis, the consequent recession in the UK and the imposition of austerity measures by the government.
- In just five years since April 2007, prices have risen by 18%, while average annual earnings have gone up by just 10%.
- That has left wages and salary increases lagging behind inflation by 8% in just five years.