WEBVTT 00:00:00.000 --> 00:00:03.068 ♪ [music] ♪ 00:00:14.000 --> 00:00:19.280 - [Alex] Is Real GDP per capita a good measure of the standard of living? People 00:00:19.280 --> 00:00:23.420 tell me all the time, "You economists, you're too materialistic." Doesn't Real 00:00:23.420 --> 00:00:29.390 GDP per capita just measure the things we buy? What about our health, our happiness, 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 00:00:35.640 --> 00:00:40.810 you why it's probably the best single measure of the average standard of living 00:00:40.810 --> 00:00:45.180 in a country. And that's not because material goods are the most important 00:00:45.180 --> 00:00:51.530 goods. It's because Real GDP per capita is correlated with many of the other things 00:00:51.530 --> 00:00:57.110 that we care about. Let's start with life expectancy. Here we show Real GDP per 00:00:57.110 --> 00:01:02.990 capita along the horizontal axis and life expectancy along the vertical axis. As you 00:01:02.990 --> 00:01:07.970 can see, there's a positive correlation. Countries that have a higher GDP per 00:01:07.970 --> 00:01:15.780 capita also have a higher life expectancy. Perhaps that's not too surprising. Let's 00:01:15.780 --> 00:01:21.890 take a look at happiness. Maybe this is a more surprising fact. This chart shows GDP 00:01:21.890 --> 00:01:26.820 per capita on the horizontal axis and now a measure of happiness on the vertical 00:01:26.820 --> 00:01:32.410 axis. Again, we see a positive correlation. Countries with a higher Real 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 00:01:38.730 --> 00:01:44.860 the United Nations. It's called the Human Development Index. It combines measures of 00:01:44.860 --> 00:01:51.580 life expectancy, education, and standard of living. Overall you can see, in 00:01:51.580 --> 00:01:58.240 general, as GDP per capita increases, so does human development - at least as 00:01:58.240 --> 00:02:03.100 measured by this index. The basic story - it's pretty simple. When we have more 00:02:03.100 --> 00:02:08.460 goods and services, we can usually afford more of the other good things in life. So 00:02:08.460 --> 00:02:14.170 the good things in life, they tend to go together. However, GDP per capita is far 00:02:14.170 --> 00:02:23.230 from perfect. Here's one problem. GDP per capita misses the distribution of income. 00:02:23.230 --> 00:02:28.860 For example, let's compare the Real GDP per capita of Nigeria, Pakistan and 00:02:28.860 --> 00:02:33.990 Honduras. It's actually pretty similar. So you might think that all three countries 00:02:33.990 --> 00:02:42.330 have similar living standards. And yet, in Nigeria, about 80% of the population lives 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 00:02:53.083 --> 00:02:58.380 can the number of people living in abject poverty be so different, when Real GDP per 00:02:58.380 --> 00:03:05.040 capita is about the same? The reason is that income in Nigeria is much more 00:03:05.040 --> 00:03:12.250 unequally distributed than in Pakistan or Honduras. Nigeria has many poor people, 00:03:12.250 --> 00:03:18.810 but also some very rich people. So average income, it's about the same in Nigeria, 00:03:18.810 --> 00:03:26.030 Pakistan, or Honduras, even though there are more poor people in Nigeria. Over 00:03:26.030 --> 00:03:32.150 time, however, growth in Real GDP per capita, whether in Nigeria, Pakistan, or 00:03:32.150 --> 00:03:38.290 Honduras, usually does indicate growth in everyone's incomes, including the incomes 00:03:38.290 --> 00:03:43.090 of the very poor. So this graph shows growth in per capita incomes along the 00:03:43.090 --> 00:03:50.210 horizontal axis, with growth in the incomes of the poorest 20% on the vertical 00:03:50.210 --> 00:03:58.110 axis. Once again you see, as average per capita income increases, you also see 00:03:58.110 --> 00:04:06.210 increases in income of the very poor. Overall, Real GDP and Real GDP per capita 00:04:06.210 --> 00:04:10.390 have proven to be useful measures for comparing the standard of living of two 00:04:10.390 --> 00:04:16.029 different countries, or for comparing the same country at different points in time. 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 00:04:20.260 --> 00:04:24.740 standard of living - we get to the really crucial question. How do we increase the 00:04:24.740 --> 00:04:29.690 standard of living? How do we grow an economy? How do we increase Real GDP per 00:04:29.690 --> 00:04:35.580 capita? That is a big question, the big question of development. We'll be tackling 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 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 00:04:45.150 --> 00:04:49.080 email or leave us some feedback on our website. Thanks. 00:04:49.080 --> 00:04:54.720 - [Narrator] If you want to test yourself, click "Practice Questions." Or, if you're 00:04:54.720 --> 00:05:01.410 ready to move on, you can click "Go to the Next Video." You can also visit 00:05:01.410 --> 00:05:06.701 MRUniversity.com to see our entire Library of videos and resources. 00:05:06.701 --> 00:05:08.701 ♪ [music] ♪