1 00:00:00,000 --> 00:00:03,068 ♪ [music] ♪ 2 00:00:14,000 --> 00:00:19,280 - [Alex] Is Real GDP per capita a good measure of the standard of living? People 3 00:00:19,280 --> 00:00:23,420 tell me all the time, "You economists, you're too materialistic." Doesn't Real 4 00:00:23,420 --> 00:00:29,390 GDP per capita just measure the things we buy? What about our health, our happiness, 5 00:00:29,390 --> 00:00:35,640 education? Well, Real GDP per capita - it's not a perfect measure. But I want to show 6 00:00:35,640 --> 00:00:40,810 you why it's probably the best single measure of the average standard of living 7 00:00:40,810 --> 00:00:45,180 in a country. And that's not because material goods are the most important 8 00:00:45,180 --> 00:00:51,530 goods. It's because Real GDP per capita is correlated with many of the other things 9 00:00:51,530 --> 00:00:57,110 that we care about. Let's start with life expectancy. Here we show Real GDP per 10 00:00:57,110 --> 00:01:02,990 capita along the horizontal axis and life expectancy along the vertical axis. As you 11 00:01:02,990 --> 00:01:07,970 can see, there's a positive correlation. Countries that have a higher GDP per 12 00:01:07,970 --> 00:01:15,780 capita also have a higher life expectancy. Perhaps that's not too surprising. Let's 13 00:01:15,780 --> 00:01:21,890 take a look at happiness. Maybe this is a more surprising fact. This chart shows GDP 14 00:01:21,890 --> 00:01:26,820 per capita on the horizontal axis and now a measure of happiness on the vertical 15 00:01:26,820 --> 00:01:32,410 axis. Again, we see a positive correlation. Countries with a higher Real 16 00:01:32,410 --> 00:01:38,730 GDP per capita also tend to have happier people, on average. Here's a data set from 17 00:01:38,730 --> 00:01:44,860 the United Nations. It's called the Human Development Index. It combines measures of 18 00:01:44,860 --> 00:01:51,580 life expectancy, education, and standard of living. Overall you can see, in 19 00:01:51,580 --> 00:01:58,240 general, as GDP per capita increases, so does human development - at least as 20 00:01:58,240 --> 00:02:03,100 measured by this index. The basic story - it's pretty simple. When we have more 21 00:02:03,100 --> 00:02:08,460 goods and services, we can usually afford more of the other good things in life. So 22 00:02:08,460 --> 00:02:14,170 the good things in life, they tend to go together. However, GDP per capita is far 23 00:02:14,170 --> 00:02:23,230 from perfect. Here's one problem. GDP per capita misses the distribution of income. 24 00:02:23,230 --> 00:02:28,860 For example, let's compare the Real GDP per capita of Nigeria, Pakistan and 25 00:02:28,860 --> 00:02:33,990 Honduras. It's actually pretty similar. So you might think that all three countries 26 00:02:33,990 --> 00:02:42,330 have similar living standards. And yet, in Nigeria, about 80% of the population lives 27 00:02:42,330 --> 00:02:53,083 on less than $2 a day. In Pakistan, it's only 60%. In Honduras, it's only 33%. How 28 00:02:53,083 --> 00:02:58,380 can the number of people living in abject poverty be so different, when Real GDP per 29 00:02:58,380 --> 00:03:05,040 capita is about the same? The reason is that income in Nigeria is much more 30 00:03:05,040 --> 00:03:12,250 unequally distributed than in Pakistan or Honduras. Nigeria has many poor people, 31 00:03:12,250 --> 00:03:18,810 but also some very rich people. So average income, it's about the same in Nigeria, 32 00:03:18,810 --> 00:03:26,030 Pakistan, or Honduras, even though there are more poor people in Nigeria. Over 33 00:03:26,030 --> 00:03:32,150 time, however, growth in Real GDP per capita, whether in Nigeria, Pakistan, or 34 00:03:32,150 --> 00:03:38,290 Honduras, usually does indicate growth in everyone's incomes, including the incomes 35 00:03:38,290 --> 00:03:43,090 of the very poor. So this graph shows growth in per capita incomes along the 36 00:03:43,090 --> 00:03:50,210 horizontal axis, with growth in the incomes of the poorest 20% on the vertical 37 00:03:50,210 --> 00:03:58,110 axis. Once again you see, as average per capita income increases, you also see 38 00:03:58,110 --> 00:04:06,210 increases in income of the very poor. Overall, Real GDP and Real GDP per capita 39 00:04:06,210 --> 00:04:10,390 have proven to be useful measures for comparing the standard of living of two 40 00:04:10,390 --> 00:04:16,029 different countries, or for comparing the same country at different points in time. 41 00:04:16,029 --> 00:04:20,260 Okay. So now that you know that Real GDP per capita - it's a good measure of the 42 00:04:20,260 --> 00:04:24,740 standard of living - we get to the really crucial question. How do we increase the 43 00:04:24,740 --> 00:04:29,690 standard of living? How do we grow an economy? How do we increase Real GDP per 44 00:04:29,690 --> 00:04:35,580 capita? That is a big question, the big question of development. We'll be tackling 45 00:04:35,580 --> 00:04:40,730 it in a number of future videos. But before you go, take a moment to let us 46 00:04:40,730 --> 00:04:45,150 know how we're doing. What do you think of the videos? How can we improve? Drop us an 47 00:04:45,150 --> 00:04:49,080 email or leave us some feedback on our website. Thanks. 48 00:04:49,080 --> 00:04:54,720 - [Narrator] If you want to test yourself, click "Practice Questions." Or, if you're 49 00:04:54,720 --> 00:05:01,410 ready to move on, you can click "Go to the Next Video." 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