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- [Alex] 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
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