GN.AEC,Gr.

11Economics Page1



Unit26.Economic
Development(Standardof
Living)
Standard of living is a measure of welfare of people living in an economy.
Standard of living refers to the quantity and quality of goods and services
individualsenjoyduringaperiodoftime.Standardoflivingmainlydepends
on real income. People with high real incomes enjoy a high standard of
living.However,thereareotherfactorstobeconsideredandtheseinclude:
Level of education, Quality of health services available, Quality of housing,
Possession of durable consumer goods, dependency ratio, Life expectancy,
Qualityofenvironment,Peace,Individualfreedometc.

EconomicGrowthandStandardofLiving
EconomicgrowthisanincreaseinthecountrysannualrealGDP.Economic
growth usually leads to an improvement in the standard of living. This is
because it leads to an increase in real income and enables people to enjoy
more goods and services. This raises the standard of living. An increase in
real GDP (economic growth) increases employment and income and hence
raisesthestandardofliving.Itincreasesthegovernmenttaxrevenuefrom
both direct and indirect taxation and enables the government to provide
bettersocialservicessuchasbettereducation,healthservices,housingand
infrastructure. This raises peoples standard of living. Therefore a simple
measureofstandardoflivingisintermsofrealnationalincomepercapita.

Standardofliving=Realnationalincomeperhead=
Rea| Nat|una| Incume
Tuta| Pupu|at|un

However, GDP per capita is not an adequate measure of welfare or

happiness for a society. There are many other factors which contribute to
welfare.Theseincludegoodhealth,havingfriendsandfamilyandlivingina
society where the government is not oppressive. Economic development
today tends to be defined in terms of freedom and lack of freedom.
Individuals have a lack of freedom, for example, when they cant afford
enoughtoeat,whentheysufferfrompreventableillness,orwhentheylack
civilliberties.

Limitations of using national income figures to compare living

standardsovertime
Changesinnationalincomeareusedtoindicatechangesinthestandardof
living over time. Comparing the national income of the country today with
nationalincomeinthepastmaynotbemisleadingbecauseofthefollowing
reasons.
Priceshavetendedtoincreaseovertime.Soanincreaseinnationalincome
over the period does not necessarily indicate that there has been an
increase in goods and services produced in the economy. So when
measuring the standard of living, it is essential to consider real GDP not
nominalGDP.

When comparing standard of living, it is essential to take account of

populationchanges.Forexample,ifrealnationalincomeincreasesby3%in
one year, but the total population also increases by 3% in the same year,
thentherewillbenochangeintheaveragestandardofliving.Itisgrowthin
incomeperheadwhichmakeshigherlivingstandardsoflivingpossible.

National income statistics do not indicate how the income is distributed.

Outputmayincrease,butifthedistributionofincomebecomesveryuneven
onlyafewmayexperienceariseintheirmaterialstandardofliving.

National income figures do not indicate the types of goods and services
produced. A large increase in defense equipment or capital goods would
increase the national income per head, but standard of living mainly
dependsontheoutputofconsumergoodsandservices.

Higher GDP figures may also give a misleading indication of changes in

economicwelfareiftheyoccurredatthesametimetheworkinghourshave
increasedorworkingconditionshavedeclined.

National income statistics do not take account of externalities produced by

the economy. An increase in production will raise the national income per
headbut,atthesametime,itmayalsoleadtoanincreaseinexternalcosts,
intheformofmorepollution,moretrafficcongestionandmorenoise.The
standardoflivingwouldnothaverisenbyasmuchasthelevelofincreasein
thenationalincomeperhead.
GN.AEC,Gr.11Economics Page2

Ifpublicsectorpayincreasesfasterthaninflation,therewillbeanincrease
in real national income, but there may be no extra goods and services
produced.
It is also possible that official GDP figures may understate the quantity of
goodsandserviceswhichpeopleenjoy.Thisisbecausetheoutputproduced
in the black economy is not included in GDP. In addition a number of non
marketed services, for example child rearing and DIY, are not included in
GDPfigures,althoughtheyaffectthequalityoflife.
Limitations of using national income figures to compare living
standardsindifferentcountries

Figures for national income per capita are used as a means of comparing
livingstandardsindifferentcountries.Thesecomparisons,however,canbe
misleadingforthefollowingreasons.

In many developing countries, a large part of agricultural output is not

traded and therefore not included in the national income figures. The
national income per head may therefore underestimate their actual
standardofliving.

Two countries may have the same real GDP per head but their standard of
livingwillnotbethesame
Ifpeopleinonecountryhavetoworkmuchlongerhours,
Ifonecountryspendsagreaterpercentageofitsnationalincomeon
defensethantheothercountry,or
If the income is much more unequally distributed in one country
thanintheother
Externalities, the size of the black economy and the quality of goods and
servicesarealsolikelytodifferbetweencountries

Somedifferencesarisefromclimateorgeography.Peopleofcoldcountries
havetospendalargeproportionoftheirincomesonheatingthanpeoplein
a tropical country. But this extra expenditure does not give the people of
coldcountriesahigherstandardofliving

There is also the problem of what exchange rate to use when comparing
one countrys national income with another. The official rate of exchange
may not be a good indicator of relative domestic purchasing powers of the
two countries, because it only takes account of the products entering into
international trade. The exchange rate may also be held artificially high or
lowbygovernmentaction.

Therefore, if national income figures are to be used to compare living

standardsbetweencountriesitisimportanttouseanexchangerate,which
compares the cost of living in each country. These exchange rates are
known as Purchasing Power Parities (PPP). PPPs are a way of measuring
exchangeratesusingtheideaofhowmuchabasketofgoodswouldcostin
various countries. The PPP seek to measure the cost of a typical basket of
goodsandservicesindifferentcountries,bothinternationallytradedgoods
and services and noninternationally traded goods and services, like
housing.Forexample,ifatypicalbasketofgoodscoststenfrancsinFrance
and 1 in the UK, then the national income should be converted at an
exchange rate of 10 francs to 1, even if the market exchange rate gives a
verydifferentfigure.

HumanDevelopmentIndex(HDI)
The HDI is a composite indicator of three basic components of human
development. The HDI is complied by the United Nations Development
Programme(UNDP).ThethreecomponentsofHDIare
Longevity,asmeasuredbylifeexpectancy
Knowledge (education attainment), as measured by a combination
ofadultliteracyandmeanyearsofschooling
Standardofliving,asmeasuredbyrealGDPpercapitaatpurchasing
powerparities.
ThethreecomponentsoftheHDIareequallyweighted.TheHDIattemptsto
rank all countries on a scale of 0 (worst) to 1 (best) and classify countries
intofourmajorgroups.
Lowhumandevelopment(leastdevelopedcountries)
Mediumhumandevelopment(developingcountries)
Highhumandevelopment(developingcountries)
Veryhighhumandevelopment(developedcountries)

The advantage of HDI is that it combines the effects of increased growth

with other quality of life indicators. In this respect, it is an important
measure of development. However, the index does not take account of
GN.AEC,Gr.11Economics Page3



poverty or other measures of deprivation. In this respect, some people
regardthatithasonlyalimitedvalue.

OthermeasuresofEconomicDevelopmentorStandardofLiving

GDP per capita, measured at purchasing power parity rates is an indicator

ofthevolumeofgoodsandservicesthattheaveragecitizencanconsume.

The percentage of adult males employed in agriculture is an indicator of

thedevelopmentoftheeconomyasawhole.AsGDPrises,thispercentage
tends to fall. Partly it is because labour is replaced by capital equipment
such as tractors. Partly it is because as incomes grow, most of the increase
indemandisnotforfoodbutforotherluxurygoodsandservices.

School enrolment shows the proportion of children of school age who are
enrolledinschool.InarichcountryliketheUK,almost every child is
enrolled. In poor country, enrolment is much lower. Education is an
importantaspectofindividualfreedom.Lackofeducationrestrictspeoples
abilities to get a job, read a book, fill in a form or understand a technical
manual.

Accesstocleanwaterisessentialforgoodhealth.Thosewithoutaccessto
clean water are highly likely to suffer from water born diseases which at
worstmaykillthem.

Lowlevelsofenergyconsumptionpercapitaareanindicationoflowlevels
ofGDP.

Access to mobile phones is an indication of access to communication, an

importantfreedom.

The population structure of a country also changes with economic

development. Developing countries have a high birth rate, high death rate
andrelativelyahighrateofgrowthofpopulation.Relativelyalarge%ofthe
populationwillbeintheyoungeragegroup(theyhaveayoungpopulation).
Dependency ratio is high. A large percentage of the working population in
employedintheprimarysectormainlyagriculture.

But in developed countries Birth rate,death rate and the rate of growth of
population are relatively low. Relatively a large % of the population will be
in the older age group (they have an ageing population). Dependency ratio
islow.Alargepercentageoftheworkingpopulationisemployedintertiary
sector.

Asacountryachieveseconomicdevelopment:
TherealGDPpercapitarises
Theproportionofmaleworkersinagriculturefalls
Thepercentageenrolledineducationrises
The percentage of the population with access to improved water
sourcesrises
Electricitypowerconsumptionrises
Mobilephonesubscriptionsrise

Questionsfordiscussion
1. In developing countries the standard of living is often lower than the
standardoflivingindevelopedcountries.Identifyfourindicatorsthatmight
confirmthis(4)
2. Sometimes three is much poverty in developing countries. Discuss
reasonswhythismightbeso(6)
3. Discuss how the standard of living in developing country might be
improved(10)
4. Discuss what matters relating to employment might be relevant when
consideringapersonsstandardofliving?(6)
5.Describewhatfactorsmightbeimportantinconsideringthestandardof
living?(5)
6. Why might an increase in GDP improve the standard of living in the
country?(6)
7.Discusshowadevelopingcountrymightdifferfromadevelopedcountry
in the types of industries and services that are most likely to contribute to
GDP(7)
8. Discuss what differences might be observed comparing the standard of
living of people in a developing economy with the standard of living in a
developedeconomy(8)
9. Discuss why it might be important to encourage infrastructure
developmentinadevelopingcountry?(7)
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10.Whatmightbetheopportunitycostofinfrastructuredevelopmentina
developingcountry?(5)
11. Discuss why it might be beneficial to a developing country if it
diversifieditseconomy(7)
12.Whatismeantbyadevelopingcountry?(4)
13. Explain two reasons why education in a developing country is often
providedbythepublicsector.(4)
14.Discusswhateffectsinvestmentintheeducationsystemmighthaveina
developingcountry.(6)
15. As countries develop they often rely less on exports of agricultural
products and more on exports from other sectors. Discuss the possible
benefitsofthis.(7)
16. State four ways in which multinational companies can help developing
countries(4)
17.Explainwhatindicatorsmightbeusedtodeterminethatanotionispoor
(8)

Economic development
1. A poor country is likely to have the following characteristics:
low real GDP per head
high birth rate, high death rate and high rate of growth of
population
high infant mortality rate and low life expectancy
low level of education and health service
poor infrastructure development
a large % of the labour force work in primary sector, mainly
agriculture
poor housing
long working hours and poor working condition

2. Poverty is a situation where people do not have enough income to buy
the basic necessities of life. A person is considered poor if his or her
income level falls below some minimum level necessary to meet basic
needs. The following are some of the reasons for high level of poverty in
developing countries.

Rapid population growth: Population growth is a key problem to
economic development. Many less developed countries have rates of
population growth that are even larger than their rates of growth of GDP.
Hence they experience a fall in GDP per capita and a fall in the standard of
living.

Heavy dependence on agriculture: In low income countries, 70% or
more of the labour force works on the land. The productivity in
agricultural sector is very low. Dependence on subsistence farming leads
to low income and poverty.

Unequal distribution of income: There is likely to be a large difference
between peoples income and wealth in developing countries. Those with
no wealth, low education and skills are likely to earn very low income.

Poor natural resources: Many developing countries have very poor
natural resources. They are tropical regions where soils and climatic
conditions unfavorable to many agricultural activities.

Undeveloped human resources: In less developed countries, workers
lack education and technical training. This together with low standards of
health means a low level of physical performance. This is a major reason
for poverty.

3. Standard of living or quality of life refers to the quantity and quality of
goods and services an individual enjoys during a period of time. Standard
of living mainly depends on real income. People with high real incomes
enjoy a higher standard of living. The following policies may be used for
improving the standard of living of a developing country:
Family planning measures to control birth rate: Population growth is
a key barrier to economic development. The government could use family
planning measures in order to control birth rate. If population grows less
quickly, per capita income will rise, unemployment may fall and standard
of living might improve.
Increased spending on infrastructure: Infrastructure means a nations
roads, railways, housing, hospitals, schools, electricity, water supply,
airport etc. Infrastructure plays an important role in increasing a countrys
rate of economic growth and improving the general standard of living.
Lack of Infrastructure development is a barrier to economic development
in developing countries. Therefore, infrastructure development is very
important for improving standard of living in developing countries.
Increased spending on education, training and health care: In less
developed countries, workers lack education and technical training. This
together with low standards of health means a low level of physical
performance. This is a serious barrier to economic development.
Therefore, it is important to increase the workers productivity through
education, training and better health care for improving the standard of
living.
Diversification: In low income countries, 70% or more of the labour force
works on the land. The productivity in agricultural sector is very low.
Many developing countries depend on primary products as the main source
of exports. This causes problems because the real prices of primary
products have been falling and also there have been sharp fluctuations in
GN.AEC,Gr.11Economics Page5



the prices of primary products. Developing countries, therefore, needs to
diversify to secondary and tertiary products.
Establishment of financial institutions such as banks: The lack of an
adequate and trusted system of financial institutions of often a barrier to
development. Investment plays a key role in growth. An important
source of fund for investment is the savings of households. When banks
and other financial institutions do not function well and smoothly, the link
between private saving and investment may be broken. This leads to a
low rate of investment and growth. The establishment of financial
institution should lead to improvement in standard of living.
Attracting foreign direct investment (MNCs): Multinational companies
may help a country in a number of ways. Investment by multinational
companies brings foreign currency. This will improve the balance of
payments in the short run. They increase employment and income in the
home country. This will improve the standard of living. The government
might encourage MNCs to set up in business by giving subsidies or
reducing tax on profits.

4. The following matters relating to employment may be relevant when
considering a persons standard of living: Wage rate, Working condition,
Non- monetary benefits, Number of working hours, Safety, Travel time
and expenses.

5. Standard of living or quality of life refers to the quantity and quality of
goods and services an individual enjoys during a period of time. Standard
of living mainly depends on real income. People with high real incomes
enjoy a higher standard of living. However, there are other factors to be
considered and these include: Level of education, Quality of health
services available, Quality of housing, Possession of durable consumer
goods, dependency ratio, Life expectancy, Quality of environment, Peace,
Individual freedom

6. Standard of living mainly depends on real income. An increase in GDP is
likely to increase the per capita income and enables people to enjoy more
goods and services. This raises the standard of living. An increase in real
GDP (economic growth) increases employment and income and hence
raises the standard of living. It increases the government tax revenue
from both direct and indirect taxation and enables the government to
provide better social services such as education, health services. This
raises peoples standard of living.
However, the standard of living might not increase as much as the level of
increase in GDP if
Population increases faster than GDP
The distribution of income becomes more unequal
The working hours increase or working condition worsens
There is an increase in external costs such as pollution

7. The developing countries have a large primary sector relative to other
two factors. They specialize in agriculture and minerals production. A large
% of the labour force is likely to be employed in primary sector and
primary sector produces the largest % of the GDP in developing countries.
Their manufacturing sector comprises of cottage industries and tertiary
sector is usually very small.

In most developed countries, more than half of the labour force is
employed in tertiary sector occupation and it is the tertiary sector which
produces the largest % of the GDP in these countries. The second largest
% of the GDP is produced by the secondary sector (though in some
developed countries secondary sector output may be the highest % of
their GDP) and primary sector produces relatively small % of the GDP.

8. The following differences may be observed between developing and
developed countries.
Real national income per head (Per capita income): This is the value
of the total output of goods and services produced in a country during a
year divided by total population. In developing countries, the real national
income per head is very low and therefore the standard of living is low. In
developed countries the real national income per head is high and
therefore the standard of living is high. Poverty is likely to be high in
developing countries compare with developed countries.
Health and mortality: People in developing countries on average enjoy
poorer health and are likely to die younger than in developed countries. In
developing countries most people do not have access to nutrient food,
clean water and improved medical facilities and therefore they have a low
life expectancy compare with people in developed countries.
Education: In developing countries there is lack of education and training
facilities compare with developed countries. So a large percentage of the
working population is unskilled.
Housing: People in developing countries do not have proper houses to
shelter. But in developed countries people enjoy modern and improved
housing.
Infrastructure: In developing countries there is a lack of electricity,
water supplies, transport and communication, good road, railways and
other capital goods. But in developed countries people enjoy a well
developed infrastructure.
Population: Developing countries have a high birth rate, high death rate
and relatively a high rate of growth of population. Dependency ratio is
high. A large percentage of the working population in employed in the
primary sector mainly agriculture. But in developed countries Birth rate,
death rate and the rate of growth of population are relatively low.
Dependency ratio is low. A large percentage of the working population is
employed in tertiary sector.

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9. Infrastructure means a nations roads, railways, housing, hospitals,
schools, electricity, water supply, airport etc. Infrastructure plays an
important role in increasing a countrys rate of economic growth and
improving the general standard of living. Lack of Infrastructure
development is a barrier to economic development in developing countries.
Providing better roads, railways, airports, water supply, and
communication will help firms in primary, secondary and service sectors to
operate more efficiently and to increase their output. Better schools,
hospitals and training centers make the labour force more productive. Well
developed infrastructure will also attract foreign investment to these
countries. All these factors will contribute to a faster rate of economic
growth and a rise in the standard of living in developing countries.
Therefore, infrastructure development is very important in developing
countries.

10. The opportunity cost of infrastructure development may be food aid to
poor, implementing family planning measures and any other project which
is forgone in order to spend the money for infrastructure development.

11. In low income countries, 70% or more of the labour force works on the
land. The productivity in agricultural sector is very low. Many developing
countries depend on primary products as the main source of exports. This
causes problems because the real prices of primary products have been
falling and also there have been sharp fluctuations in the prices of primary
products. Developing countries, therefore, needs to diversify.
Diversification into secondary and tertiary industries may help developing
countries in the following ways.

More stable income: Prices of manufactured goods and services are
more stable in the export markets than the prices of primary products.
This leads to a more stable income for producers. This also makes
investment planning easier.

Faster rate of economic growth: The demand for manufacturers and
services are likely to increase faster than the demand for agricultural
products. This is because, when income rises people are likely spend larger
% of their income on luxury goods and services and spend smaller % of
their income on food. The increase in demand leads to increase in
employment and a faster rate of economic growth. Countries which are
able to shift their resources from low growth agriculture to high growth
secondary and tertiary sectors achieve a high rate of economic growth.

Less difficulties of storage and transportation: Manufactured goods
are easier and less expensive to store and transport than agricultural
products. Most agricultural products are perishable and have a short
storage period compare with manufactured goods.

Less dependent on seasonal weather: The output of agricultural
products is very much dependent upon weather condition than output of
manufactured goods. This once again means a more stable output and
income for producers.

They can avoid the problem of overspecialization: Specialization on a
narrow range of products may make the economy more vulnerable to
economic change. Diversification reduces the vulnerability and provides
greater security.

They can conserve natural resources: Some developing countries
specialize in the production and the export of non-renewable natural
resources such as coal, iron ore and oil. These countries may not be able
to sustain their growth if these resources exhaust. Diversification enables
conservation of natural resources and may lead to sustainable economic
growth.

12. A developing country is one where the average standard of living is
relatively low. The low income developing countries are also described as
third world countries. E.g. India, Pakistan etc. In a developing country,
the per capita income is likely to be low and there is likely to be high level
of poverty. Most people may not have access to education, health services,
nutrient food, clean water and good housing. A large % of the working
population is employed in primary industries, mainly agriculture. There is
likely to be high birth rate, high death rate and a high rate of growth of
population. The dependency ratio is high and life expectancy is low.

13. The following may be the reasons why education is provided by the
public sector.
Education is a merit good. It has high external benefits. It is under
provided by the private sector.
In developing countries, there is likely to be high inequalities in the
distribution of income. If education is sold at the market price, low
income people will not be able to obtain them. This will lead to loss
of external benefits. That is why, public sector provides it.
Private schools and universities which have monopoly power may
exploit students by charging high fee.

14. Investment in education may have the following benefits to a
developing country.
It increases workers skills and their productivity. An increase in
productivity of labour leads to a faster rate of economic growth
(increase in real GDP). A high rate of economic growth leads to
improvements in standard of living.
An increase in productivity of labour increases labour demand and
hence raises wages and employment.
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Education may make the labour force more mobile. Increase in
mobility of labour reduces structural unemployment and the wage
differentials between occupations.
Investment in health education may make labour force more
healthy and hence increase productivity.
Investment in education enables developing countries to deal with
skill shortages and become less dependent on imported labour
force.
Investment in education will enable firms to obtain skilled workers.
This will make it easier for them to expand and modernize.