Real GDP Per Capita and the Standard of Living

Is Real GDP per capita a good measure of the standard of living? People tell me all the time, "You economists, you're too materialistic." Doesn't Real GDP per capita just measure the things we buy? What about our health, our happiness, education? Well, Real GDP per capita -- it's not a perfect measure. But I want to show you why it's probably the best single measure of the average standard of living in a country. And that's not because material goods are the most important goods. It's because Real GDP per capita is correlated with many of the other things that we care about.

Let's start with life expectancy. Here we show Real GDP per capita along the horizontal axis and life expectancy along the vertical axis. As you can see, there's a positive correlation. Countries that have a higher GDP per capita also have a higher life expectancy. Perhaps that's not too surprising. Let's take a look at happiness. Maybe this is a more surprising fact. This chart shows GDP per capita on the horizontal axis and now a measure of happiness on the vertical axis. Again, we see a positive correlation. Countries with a higher Real GDP per capita also tend to have happier people, on average.

Here's a data set from the United Nations. It's called the Human Development Index. It combines measures of life expectancy, education, and standard of living. Overall you can see, in general, as GDP per capita increases, so does human development -- at least as measured by this index. The basic story -- it's pretty simple. When we have more goods and services, we can usually afford more of the other good things in life. So, the good things in life -- they tend to go together. However, GDP per capita is far from perfect.

Here's one problem. GDP per capita misses the distribution of income. For example, let's compare the Real GDP per capita of Nigeria, Pakistan, and Honduras. It's actually pretty similar. So, you might think that all three countries have similar living standards. And yet, in Nigeria, about 80% of the population lives on less than $2 a day. In Pakistan, it's only 60%. In Honduras, it's only 33%. How can the number of people living in abject poverty be so different, when Real GDP per capita is about the same? The reason is that income in Nigeria is much more unequally distributed than in Pakistan or Honduras. Nigeria has many poor people, but also some very rich people. So average income -- it's about the same in Nigeria, Pakistan, or Honduras, even though there are more poor people in Nigeria.

Over time, however, growth in Real GDP per capita, whether in Nigeria, Pakistan, or Honduras, usually does indicate growth in everyone's incomes, including the incomes of the very poor. So, this graph shows growth in per capita incomes along the horizontal axis, with growth in the incomes of the poorest 20% on the vertical axis. Once again you see, as average per capita income increases, you also see increases in income of the very poor. Overall, Real GDP and Real GDP per capita have proven to be useful measures for comparing the standard of living of two different countries, or for comparing the same country at different points in time.

Okay. So now that you know that Real GDP per capita -- it's a good measure of the standard of living, we get to the really crucial question. How do we increase the standard of living? How do we grow an economy? How do we increase Real GDP per capita? That is a big question, the big question of development. We'll be tackling it in a number of future videos. But before you go, take a moment to let us know how we're doing. What do you think of the videos? How can we improve? Drop us an email or leave us some feedback on our website. Thanks.