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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
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.
- [Narrator] If you want to test yourself, click "Practice Questions." Or, if you're
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