STANDARD OF LIVING
level of wellbeing of a typical individual in a cty: encompasses material and non-material aspects of life

Definitions

Standard Of Living:
-The well-being of a typical person in a country
-Encompasses material and non-material aspects of life.

National Income
The total income generated from the production of goods and services by the residents of a country within given period of time

Gross National Product
-Market value of the final goods and services produced by the productive factors owned by nationals both within and out of a country within a given period of time
-Before the deduction of depreciation

Gross Domestic Product
-Market value of all final goods and services produced within an economy in a given period of time
-Before the deduction of depreciation

Nominal
Measured at current year prices

Real
Measured at base year prices

Material SOL: the quantity of G&S available to an individual in a particular year
Measured by real income per head

INDICATORS OF NY
GNP: Takes into account the locals that work abroad
Real vs Nominal: Real takes into account inflation. Rise in nominal GDP does not necessarily mean a rise in quantity of goods and services produced. A rise in GDP can be attributed to the rise in GPL/rise in actual output. If inflation rate > nominal GDP growth, the material SOL may not have improved
Per capita: Needed bc takes into account changes in size of population. If the population has increased by equal or greater proportion than real GDP, the material SOL has not increased!
PPP: Adjust GDP using PPP
Official Exchange Rates fluctuate significantly due to speculative activities, movements in the relative prices of only traded goods and government intervention in the currency market -> ceteris paribus, using such xchange rate causes GDP value to change arbitrarily, makes comparison of GDP meaningless
Furthermore, does not reflect purchasing power of the currencies.
Example US and SG has same GDP per cap. of USD 100, using official exchange rate - Seems like same SOL. But GPL in SG>US, hence the USD 100 in US will be able to buy more G&S than in SG.
BOP also can measure Mat SOL

MEASUREMENT PROBLEMS (suitable for developed vs developing)

Per Capita
Measures the average amount of final goods and services that a typical person in the country produces and consumes

PPP
-Measures the amount of foreign currency needed to purchase the same basket of G&S in 2 different countries
-A currency conversion rate that equalises the difference in purchasing power of 2 different currencies by eliminating the differences in price levels between countries

Example
If a basket of goods cost USD 10 in US, and the same basket of goods costs 5 SGD, then the PPP rate is 10 USD: 5 SGD
GDP per capita of each country's local currency will ten be converted using PPP rate

USE OF NY STATISTICS

  1. Measure economic growth: a drop in growth rate is a call to attention for govt. to introduce policies that stimulate AD to increase production and NY
  2. Measures level of material wellbeing
  3. Also good bc increase in GDP/capita usually means more ppl being employed to increase pdtion hence lower unN
  • However if ppl are using non-lbr FOPs to increase, then unN may not decrease

OVER TIME (within a country):

  1. Inadequate, unreliable data. Depends on level of statistical sophistication in sampling methods, data processing etc. Over time, data collection will become more comprehensive and reliable e.g. computers that allow info. input and accurate analysis. Difference in reliability of data over time makes comparisons difficult
  2. Unrecorded items: Services of housewives and subsistence farming are not transacted in the market economy. As economy develops, prev. non-mkted items are now transacted through the mkt; increase in GDP due to monetisation of transactions is not an improvement in welfare, as it is not due to the production of more G&S!
  3. Underground economy: illegal, undeclared transactions. Changes in undeclared size of underground economy not reflected in NY figure. Change in legal restrictions may legalise prev. illegal transactions; inaccurate growth in NY overtime

ACROSS SPACE (between countries)

  1. No internationally agreed method of measuring NY. Diff countries may treat diff entries of items differently in their accounting.
  2. Size of country: Affects reliability of data. Ctys like China and India have large rural areas that are inaccessible - diff. collection of data
  3. Developed vs developing: Developing ctys: large part of agricultural sector is subsistence farming: existence of relatively large non-monetary sector in developing economies -> NY figures grossly underestimate cty's output. Highly monetised and developed ctys like SG and HK will not face such problems.
    Opposite goes for housewives!
  4. Developing ctys have larger underground economy. e.g. presence of widespread drug/begging syndicate distorts the comparison of NY figures**
  5. Treatment of certain items: marijuana legal in Netherlands but not in most other ctys. GDP in Netherlands will be higher.
    Countries that differ greatly in size of underground economy will not be accurately compared using GDP per capita figures

COMPARE
To compare within country, over time:
Real GDP per capita
To compare between countries:
PPP adjusted GDP per capita
EV

  • However many devped ctys have low inflation hence real figs may not have sig advantage
  • Many DCs have low birth and pop. increases by 1% annually only

Limitations in PPP
-Due to differences in the representative basket of goods consumed. Ctys have differences in climate and culture
-Tropical regions spend more on air-conditioning and colder climates spend on heating and lighting appliances
-Diff needs must be satisfied, hence ctys may differ in the composition of the basket consumed.
Elaboration
However, even though the basket of goods may differ slightly, they are still similar. Hence, this is not a big limitation of PPP

COMPARISON PROBLEMS even if measurement is correct (suitable for ctys at similar stage of devpt)

Doesn't show Y distribution

  • High real GDP/cap doesn't mean Y is equally distributed
  • May be due to higher Y earned by a minority grp while the majority do not see improvement in SOL
  • Needs Gini Coefficient: to reflect the incme distribution across population
    Gini indicates how income is distributed across population: closer it is to 1, the more unequal income distribution is.
    EV: increasingly area of concern in SG due to worsening GC despite increase in GDP; globalisation + policies adopted for EG e.g foreign wkr policy led to widening Y gap
  • Low skilled face depressed wages/structural unN due to influx of foreign wkrs that directly compete
  • Increase in DD for high-skilled (restructuring of SG econ), earn higher wage
  • Y inequality

Composition of GDP
Material SOL increases if level of consumption per head has increased, rather than just NY per head

  • High GDP may be attributed to increased pdtn of capital goods (e.g. investment in machinery and eq) or defence, which improves future SOL but not current as n of consumer G&S to the population has not increased.
  • Increase in I also does not lead to increase in current C, but raise SOL of FUTURE.
    EXAMPLE
    North Korea GDP attributed to intensive investment in defence; NKeans do not see an increase in material SOL. Another cty with similar GDP may be attributed to high C, implying higher material welfare.

Quality of G&S
GDP is quantitative measure

  • If GDP remains the same, but qly of o/p has increased, material SOL still increases
  • Qly control measures not stringent = difference in qly between countries; same GDP but one has higher material SOL

Non-material SOL

Leisure time
-Intangible factor; working more hours increase o/p but may decrease welfare.
-If high real GDP/capita is achieved at the expense of longer working hrs and stressful working env, the SOL may not have improved
-Measure of Economic Welfare: an indicator that includes value of leisure and discounts for externalities

Externalities
-GDP does no take into account negative externalities of production that reduce welfare
-As GDP per capita increases, pollution likely increases due to increase in industrial activities
-Affect health of individuals and reduces SOL
-Figures on level of air pollution and congestion level required.

Human Develppment Index
Includes life expectancy at birth, education (expected and mean years of schooling), and GNP per capita in PPP
Expressed in overall index between 0 and 1

Measurement

  • Expenditure approach: Sum of C I G NX
  • Output approach
  • Income approach

SG Context

  • Deterioration of non-mat well being examples:
  • Increased competition/overcrowding for public amenities, e.g public transport and slide in qly standards due to increased policies adopted for higher EG (foreign wkr policies)