Standard of Living

Standard of Living, in economics, an assessment of the level of wealth and prosperity at which people live. Usually, it takes into account only material items such as income or ownership of consumer goods and not such things as air pollution that contribute to what is often referred to as the “quality of life”. There are many ways in which living standards are assessed and compared, none of which is concerned with concepts such as personal contentment.

Average national income is one way of assessing living standards and is conventionally arrived at by dividing gross domestic product (GDP) by the population to arrive at a figure for GDP per head. If the population is growing at a lower rate than GDP, living standards are deemed to be rising. If the population is growing at a higher rate than GDP living standards are said to be falling. But GDP per head, because by definition it shows only the “average”, can disguise huge variations in income distribution. For example, in a number of countries in South America, wealth is concentrated in the hands of a small minority and the vast majority of the people earn much less than GDP per head or even survive by subsistence farming.

When the GDP per head figures for several countries are converted into a common currency, such as the US dollar, it gives a rough idea of how average living standards in those countries compare. One of the flaws with this yardstick is that it takes no account of the cost of living in a country. Therefore many people prefer to judge comparative living standards by looking at GDP per head in Purchasing Power Parities (PPPs), which take into account how many goods and services can be bought for the GDP per head in local currency. PPP estimates are normally shown on a scale of 0 to 100, with the United States as 100. The differences between GDP per head and GDP per head in PPPs is sometimes negligible and sometimes substantial. For example, whichever measure you use, living standards in Australia and the United Kingdom are calculated to be about three-quarters the level of those in the United States. On the other hand, Japan’s GDP per head is about 20 percent higher than the United States’ but in terms of GDP per head in PPP, American living standards are around 18 percent higher than those in Japan.

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Another measure of living standards is the Human Development Index (HDI). First published by the United Nations Development Programme in 1990, this takes GDP per head plus adult literacy and life expectancy into account, thus reflecting a limited extent the quality of life. Like PPPs, the HDI uses a scale of 0 to 100. Judged by it, living standards in Australia, the United Kingdom, Japan, and the United States are all within a two-point range and are among the ten highest in the world.

There are numerous other yardsticks, such as infant mortality rates and car ownership levels, that give some idea of standards of living. However, levels of consumer good ownership may reflect social choices rather than living standards; for example, the proportion of homes owning a video cassette recorder is much the same in the United States as in the United Kingdom, but the percentage of homes owning a microwave oven or a dishwasher is much higher in the United States than in the United Kingdom.