What is GDP per Capita?

GDP (Gross Domestic Product) per capita is a measure of the average income or production
per person in a country. It tells us how much economic output, or goods and services, is
generated per person on average.

Formula for Real GDP per Capita: Real GDP per capita = Real GDP (the total value of goods
and services produced adjusted for inflation) divided by the population of the country. This
formula gives us an average measure of economic output per person.

ADVANTAGES OF USING GDP PER CAPITA TO MEASURE LIVING STANDARDS

1. Indicator of Material Well-being:

Explanation: GDP per capita is a useful measure because it reflects how much
economic output (goods and services) is produced on average per person in a
country. This reflects the material well-being or standard of living of the population.
Example: If Country A has a higher GDP per capita than Country B, it suggests that,
on average, people in Country A have access to more goods and services and
income, indicating a higher standard of living in terms of material wealth.

2. Takes Population into Consideration:

Explanation: By dividing the total GDP by the population of a country, GDP per
capita accounts for the size of the population. It shows the economic situation on an
individual basis, highlighting the average economic resources available to each
person. Example: Consider two countries with the same total GDP but different
populations. If Country X has a smaller population than Country Y, the GDP per
capita of Country X would be higher, indicating a potentially higher standard of living
for individuals in Country X due to less economic output being spread among fewer
people.

3. Availability of Data:
Explanation: GDP data (total economic output) and population data are readily
available from official sources, making GDP per capita a practical and widely used
indicator for measuring living standards. Example: Governments and international
organizations regularly collect and publish GDP figures and population data. This
makes it easy to calculate and compare GDP per capita across different countries or
regions, allowing for meaningful assessments of living standards and economic
conditions.

DISADVANTAGES OF GDP PER CAPITA

1. GDP Doesn't Reflect What People Can Buy:

Explanation: GDP per capita measures average income per person, but it doesn't
directly show how much individuals can buy with their income.
Example: Country A and Country B both have similar GDP per capita. However, in
Country A, the cost of living is much higher, meaning individuals have less
purchasing power despite the seemingly high GDP per capita.
 2. Unequal Distribution of Income:
Explanation: GDP per capita represents an average income, which may mask
significant income inequality within a country. Some individuals might be very
wealthy while others are living in poverty, yet the GDP per capita reflects only
the average. Example: In a country with high GDP per capita, a small percentage
of the population might control a large portion of the wealth, leaving many
others with low incomes and limited access to basic necessities.

3. Not all economic activity is declared because of the existence of a hidden,

informal or underground economy.

4. Real GDP does not consider the quality of what has been produced.

Human Development Index (HDI):

The Human Development Index (HDI) is a way to measure and compare how well
people live in different countries. It uses three main things to figure this out:

Income Level: HDI looks at how much money people have on average in each
country, adjusting for the cost of living. This helps show the real buying power of
individuals.

Education: HDI checks how much education people get in each country. It looks
at how many years adults have spent in school and how many years kids are
expected to go to school in their lifetime.

Healthcare: HDI considers how long people live on average in each country.
Longer life expectancy usually means better healthcare and living conditions.

 Advantages:
1. it focuses on three components of living standards rather than
just one, providing much accurate and reliable information

Disadvantages:
1. HDI combines three main indicators: life expectancy,
education, and income (GNI per head) into one. If a
country has good education and income but poor life
expectancy, its HDI can still be low. This means the HDI
might not accurately reflect the living standards of a
country.
2. HDI uses Gross National Income (GNI) per head, which is the average
income per person. This doesn’t show how income is distributed. A
country might have a high GNI per head, but if most of the wealth is
concentrated with a few people, many others might still be very poor.
 3. HDI doesn’t consider many other important factors like:
Environmental quality (clean air and water) Access to safe drinking
water, gender inequalities. These factors also significantly affect living
standards but are not included in the HDI.
DIFFERENCE IN LIVING STANDARDS
1. Productivity Levels Definition: Productivity refers to how efficiently goods and
services are produced. Impact: Higher productivity usually leads to higher wages.
Skilled and experienced workers are more productive and therefore earn more,
enjoying a higher standard of living.
2. Role of Governments Taxes and Redistribution: Governments can use taxes on
income, wealth, and profits to redistribute money and reduce income inequality.
Types of Economies: Mixed economies (a blend of private and government control)
are more likely to redistribute income than market economies (where the market is
mostly controlled by private businesses). Outcome: Fairer distribution of income can
improve living standards for more people.
3. Size of Population Density: In densely populated areas, like big cities, higher demand
for housing leads to higher rents and living costs.
4. General Price Level Inflation: When prices rise (inflation), the cost of living increases.
High inflation reduces purchasing power, making it harder for people to afford goods
and services.
5. Level of Education Earnings and Education: There’s a strong link between education
and income. More education typically leads to higher earnings and better living
standards. Impact: Educated individuals tend to have better job opportunities and
higher salaries.

POVERTY
1. Absolute poverty: the inability to afford basic necessities needed to live (food, water,
education, health care and shelter). This is measured by the number of people living
below a certain income threshold (called a poverty line).
2. Relative poverty means having less money and fewer resources compared to most
other people in your society. It doesn’t mean you don’t have enough to survive, but
it means you might struggle to afford things that are considered normal or necessary
for a decent life in your society.
CAUSES OF POVERTY
Unemployment: Poverty can be caused by people being unable to obtain regular
employment, especially in those countries that do not have a social welfare system paying
unemployment benefits to those out of work.
Low wages: Even if a person can obtain a job, the wages paid by an employer may be very
low, especially in those countries that do not have a national minimum wage.
Illness: People who are regularly ill are going to find it difficult to keep a job. People
suffering from mental and physical health problems are likely to find it particularly difficult
to avoid poverty. This will be a problem in those countries that do not have a national health
service.
Overpopulation: high population density will put pressure on scarce resource and the
economy may not be able to produce and provide for everyone, causing poverty.
POLICES TO CONTROL POVERTY

Introduce measures to reduce unemployment: an expansionary fiscal/monetary policy will

increase aggregate demand and increase employment opportunities. Income and standards
of living will rise.

Impose progressive taxes: income taxes are progressive, that is, they increase as income
increases. Imposing these will mean that people on higher incomes will pay a large
percentage of their incomes as tax and help reduce relative poverty.

National minimum wage A national minimum wage could be introduced, or increased in

those countries that already have a national minimum wage, to ensure that employers are
legally prevented from paying very low wages to workers. It is possible, however, that the
introduction of such a wage, pushing up the costs of labor, could lead to firms employing
fewer workers.

Improved education: Improvements in the quality of education, and also the widening of
access to education, will improve the quality of the labor force, enabling people with the
right qualifications to gain employment and increase their income.

Birth Rate: number of children born in a country each year compared to every 1000 people
of the population

Why do different countries have different birth rates?

1. People aim to have more children to counteract high levels of infant mortality(death
of baby’s).
2. Children can add to household earrings once they start work.
3. Knowledge about methods of birth control is generally less widespread in developing
countries as well as use of contraception’s, in some religions contraception’s is not
allowed
4. The level of female employment can vary between countries and this can affect
decisions about whether to have children or not.
5. If there is a tendency to marry later, this could have an effect on the birth rate.
6. In some countries, people may prefer to have a higher standard of living and do not
want the expense of having children.

Death rates: the number of people who die each year compared to every 1000 people of the
population is the death rate of an economy.
Reasons for differing death rates in different economies:

 Natural disasters and wars: hurricanes, floods, earthquakes and

famine due to lack of rain and poor harvests, and wars and civil
conflicts increase death rates.
  Medical advances and heath care: lack of medical care and
infrastructure in less-developed countries continue to be a cause for
high death rates.
 The quality of and access to health care varies - there is
usually better medical care in developed countries than in
developing countries.
 A better diet can cause a fall in death rates. Countries vary greatly
in knowledge about the importance of diet and nutrition. Also, the
quality of food and water can vary enormously between countries;
this is likely to influence death rates.

Net Migration: migration refers to the number of people entering

(immigration) and leaving (emigration) the country.

Net migration refers to the difference between immigration, the number of people
moving into a country in a given time period, and emigration, the number of people
moving out of a country in a given time period. A net inward migration will increase
the working population of the economy, but can put pressure on governments
finances as demand for housing, education and welfare increase.
Reasons for differing net migration in different economies:

Living standards: people move to countries where living standards are high which
they can benefit from.

Employment/wages: people migrate mainly to seek better job opportunities.

Widespread unemployment and low wages in the home country will cause people to
move to countries with better employment opportunities and higher wages.

Climate: very cold or very warm countries/regions will face more emigration than
other countries.

Consequences of an ageing population:

The workforce will decline and there will be much dependence on the tax-paying
population to fund the welfare of old people.

Increase in demand for products for old people including healthcare.

The government will have to spend more on housing, old age welfare schemes etc.

Old people are less mobile and so the economy will be slow to adapt to new
technologies.

 Consequences of changes in the gender distribution:

 having more females will encourage birth rates to rise and increase
population growth
 more females in employment will increase productivity
 more females in education and employment will increase living
standards
Consequences of an ageing population:
 The workforce will decline and there will be much dependence on the
tax-paying population to fund the welfare of old people.
 Increase in demand for products for old people including healthcare.
 The government will have to spend more on housing, old age welfare
schemes etc.
 Old people are less mobile and so the economy will be slow to adapt to
new technologies.
 The reasons for low economic development
1.Over-Dependence on Agriculture
In less-developed economies, most people are farmers. They grow food
mainly to feed themselves and their families. Any extra food is sold, but
there’s not much trade happening. Result: This leads to low incomes and
little or no economic growth.

2. Domination of International Trade by Developed Economies

Exploitation: Wealthier countries buy natural resources from poorer
countries at low prices. They sell products made from these resources at
higher prices in international markets. Rich countries support their own
industries with subsidies, increasing supply and lowering global prices.
Poorer countries can’t compete with these low prices and lose jobs and
income.

3. Low Levels of Savings: People in under-developed economies earn very

little. Widespread poverty means people have little or no money to save.
Without savings, there is no money to invest in businesses or industries.