Indicators of Living Standards

Exam code: 2281

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

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 per capita, number of doctors/1000 people; infant mortality rate, and % of the population with access to clean drinking water
- Composite indicators such as the Human Development Index (HDI)

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 and 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 and 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

This metric take the real GDP and divides it by the number of people in the population

$Real GDP per capita = \frac{rGDP}{Population}$

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 per capita than Burundi

Advantages	Disadvantages
Allows comparisons – helps compare living standards between countries or over time Adjusts for population size – gives a better measure than total GDP alone Useful indicator of economic growth – helps track whether an economy is growing or shrinking on a per-person basis Inflation adjusted – when measured in real terms, it gives a clearer picture of changes in purchasing power	Ignores income distribution – does not show how evenly income is shared among the population Non-market activities excluded – ignores work like home care or informal sector jobs Doesn’t show quality of life – doesn't measure health, education or environmental quality Currency value differences – exchange rates can distort international comparisons

Advantages

Disadvantages

Allows comparisons – helps compare living standards between countries or over time
Adjusts for population size – gives a better measure than total GDP alone
Useful indicator of economic growth – helps track whether an economy is growing or shrinking on a per-person basis
Inflation adjusted – when measured in real terms, it gives a clearer picture of changes in purchasing power

Ignores income distribution – does not show how evenly income is shared among the population
Non-market activities excluded – ignores work like home care or informal sector jobs
Doesn’t show quality of life – doesn't measure health, education or environmental quality
Currency value differences – exchange rates can distort international comparisons

The Human Development Index (HDI) is a measure used to compare the development levels of different countries, not just based on income, but also on health and education
Developed by the United Nations, the Human Development Index is a combination of 3 indicators
1. Health – measured by life expectancy at birth
2. Education – measured by average years of schooling and expected years of schooling
3. Income, as measured by the real gross national income per capita at purchasing power parity (PPP)
Each indicator is given equal weighting in the index
The index ranks countries on a score between 0 and 1
- A score closer to 1 means a higher level of human development
- A score closer to 0 means a lower level of human development

Source: UNDP Data Centre

A value of less than 0.550 is considered low development, e.g. Senegal was at 0.514 in 2021
A value of 0.550-0.699 is considered medium development, e.g., Bangladesh was at 0.667 in 2021
A value of 0.700-0.799 is considered high development; e.g., Thailand was at 0.777 in 2021
A value ≥ 0.800 is considered very high development, e.g. Austria was at 0.918 in 2021

One of the main advantages is that the HDI is a composite indicator which provides a more useful comparison metric than single indicators do

Advantages	Disadvantages
It incorporates three of the most important metrics for households, i.e., health, education and income It is widely used all over the world, which provides an opportunity for meaningful comparisons It provides a goal for governments to use when developing their policies; e.g., it may help identify that the education levels are holding back improvements to the HDI, and government policy can target that It provides citizens with an understanding of how their quality of life compares to other countries	It does not measure the inequality that exists, as it uses the mean GNI per capita It does not measure or compare the levels of absolute and relative poverty that exist For many countries it does not provide useful short-term information, as gathering the data required for the calculation is difficult This means the data often lags reality by several years

Advantages

Disadvantages

It incorporates three of the most important metrics for households, i.e., health, education and income
It is widely used all over the world, which provides an opportunity for meaningful comparisons
It provides a goal for governments to use when developing their policies; e.g., it may help identify that the education levels are holding back improvements to the HDI, and government policy can target that
It provides citizens with an understanding of how their quality of life compares to other countries

It does not measure the inequality that exists, as it uses the mean GNI per capita
It does not measure or compare the levels of absolute and relative poverty that exist
For many countries it does not provide useful short-term information, as gathering the data required for the calculation is difficult
- This means the data often lags reality by several years

Real GDP per head (capita)