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- [Alex] Is Real GDP per capita[br]a good measure of the standard of living?

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People tell me all the time,

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"You economists,[br]you're too materialistic."

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Doesn't Real GDP per capita[br]just measure the things we buy?

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What about our health,[br]our happiness, education?

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Well, Real GDP per capita -[br]it's not a perfect measure.

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But I want to show you why it's probably

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the best single measure of the average[br]standard of living in a country.

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And that's not because material goods[br]are the most important goods.

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It's because Real GDP per capita

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is correlated with many[br]of the other things that we care about.

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Let's start with life expectancy.

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Here we show Real GDP per capita[br]along the horizontal axis

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and life expectancy[br]along the vertical axis.

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As you can see,[br]there's a positive correlation.

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Countries that have[br]a higher GDP per capita

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also have a higher life expectancy.

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Perhaps that's not too surprising.

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Let's take a look at happiness.[br]Maybe this is a more surprising fact.

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This chart shows GDP per capita[br]on the horizontal axis

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and now a measure of happiness[br]on the vertical axis.

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Again, we see a positive correlation.

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Countries with a higher[br]Real GDP per capita

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also tend to have[br]happier people, on average.

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Here's a data set from the United Nations.

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It's called the Human Development Index.

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It combines measures of life expectancy,[br]education, and standard of living.

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Overall you can see, in general,[br]as GDP per capita increases,

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so does human development -[br]at least as measured by this index.

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The basic story - it's pretty simple.[br]When we have more goods and services,

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we can usually afford[br]more of the other good things in life.

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So the good things in life,[br]they tend to go together.

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However, GDP per capita is far from perfect.[br]Here's one problem.

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GDP per capita misses[br]the distribution of income.

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For example, let's compare[br]the Real GDP per capita of Nigeria,

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Pakistan and Honduras.[br]It's actually pretty similar.

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So you might think that all three countries[br]have similar living standards.

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And yet, in Nigeria,

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about 80% of the population[br]lives on less than $2 a day.

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In Pakistan, it's only 60%

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In Honduras, it's only 33%.

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How can the number of people[br]living in abject poverty be so different,

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when Real GDP per capita[br]is about the same?

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The reason is that income in Nigeria[br]is much more unequally distributed

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than in Pakistan or Honduras.

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Nigeria has many poor people,

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but also some very rich people.[br]So average income,

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it's about the same in Nigeria,[br]Pakistan, or Honduras,

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even though there are[br]more poor people in Nigeria.

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Over time, however, growth[br]in Real GDP per capita,

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whether in Nigeria, Pakistan, or Honduras,[br]usually does indicate growth

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in everyone's incomes, including[br]the incomes of the very poor.

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So this graph shows growth[br]in per capita incomes[br]

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along the horizontal axis,

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with growth in the incomes[br]of the poorest 20% on the vertical axis.

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Once again you see, as average[br]per capita income increases,

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you also see increases[br]in income of the very poor.

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Overall, Real GDP and Real GDP per capita[br]have proven to be useful measures

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for comparing the standard of living[br]of two different countries,

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or for comparing the same country[br]at different points in time.

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Okay. So now that you know[br]that Real GDP per capita -

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it's a good measure[br]of the standard of living -

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we get to the really crucial question.

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How do we increase the standard of living?[br]How do we grow an economy?

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How do we increase Real GDP per capita?

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That is a big question,[br]the big question of development.

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We'll be tackling it[br]in a number of future videos.

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But before you go, take a moment[br]to let us know how we're doing.

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What do you think of the videos?[br]How can we improve?

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Drop us an email or leave us[br]some feedback on our website.

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Thanks.

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- [Narrator] If you want to test yourself,[br]click "Practice Questions."

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