Real GDP Per Capita and the Standard of Living

They say what matters most in life are the things money can’t buy.

So far, we’ve been paying attention to a figure that’s intimately linked to the things money can buy. That figure is GDP, both nominal, and real. But before you write off GDP as strictly a measure of wealth, here’s something to think about.

Increases in real GDP per capita also correlate to improvements in those things money can’t buy.

Health. Happiness. Education.

What this means is, as real GDP per capita rises, a country also tends to get related benefits.

As the figure increases, people’s longevity tends to march upward along with it. Citizens tend to be better educated. Over time, growth in real GDP per capita also correlates to an increase in income for the country’s poorest citizens.

But before you think of GDP per capita as a panacea for measuring human progress, here’s a caveat.

GDP per capita, while useful, is not a perfect measure.

For example: GDP per capita is roughly the same in Nigeria, Pakistan, and Honduras. As such, you might think the three countries have about the same standard of living.

But, a much larger portion of Nigeria's population lives on less than $2/day than the other two countries.

This isn’t a question of income, but of income distribution—a matter GDP per capita can’t fully address.
In a way, real GDP per capita is like a thermometer reading—it gives a quick look at temperature, but it doesn’t tell us everything.

It’s far from the end-all, be-all of measuring our state of well-being. Still, it’s worth understanding how GDP per capita correlates to many of the other things we care about: our health, our happiness, and our education.

So join us in this video, as we work to understand how GDP per capita helps us measure a country’s standard of living. As we said: it's not a perfect measure, but it is a useful one.

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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
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