How does the growth rate of real gdp contribute to an improved standard of living?
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One way to measure the improvement in the living standards of a country is by looking at the growth rate of its gross domestic product (GDP) per capita.1 This measure can be decomposed into: Show
The latest data released by the Organization for Economic Cooperation and Development (OECD) on changes in living standards and labor utilization reveal some interesting facts about labor productivity in these countries.2 The figure below shows the annual growth rate of labor productivity and labor utilization for the OECD countries in 2014.  As an example, Turkey’s labor utilization grew around 4 percent in 2014, whereas it experienced a drop in labor productivity of about 2 percent. These numbers imply that the improvement in living standards in Turkey—as measured by GDP per capita, which increased by 2 percent—was mainly driven by an increase in labor utilization. A similar pattern emerges for Korea, New Zealand, Portugal and Iceland. All these countries experienced positive growth in their living standards driven mainly by an increase in the number of hours per capita, as labor productivity decreased in all these countries. Low labor productivity growth could be the result of an increase in the employment of low-productivity workers or of lower technological innovation in the country. It could also reflect a lower use of capital in the country. For example, Luxembourg and Ireland also experienced an improvement in their living standards. In these countries, however, the improvement was driven by an increase in labor productivity. In Ireland, for instance, both labor productivity growth and an increase in labor utilization contributed to an improvement in the living standards of the country, whereas in Luxembourg, hours worked per capita actually dropped. Whether the increase in GDP per capita of a country has been driven mainly by productivity or utilization is important for the prospects of growth of the country. To the extent that productivity reflects advances in technology, increases in this measure are an indication of the potential of the economy to grow in the future. Notes and References1 Or the growth rate of the total value of output that the average person in a country produces. 2 Organization for Economic Cooperation and Development. “Labor productivity and utilization (indicator).” OECD Data, 2015. Additional Resources
About the Author Ana Maria Santacreu Ana Maria Santacreu is an economist and research officer at the Federal Reserve Bank of St. Louis. She joined the St. Louis Fed in 2013. Read more about the author's work. Ana Maria Santacreu Ana Maria Santacreu is an economist and research officer at the Federal Reserve Bank of St. Louis. She joined the St. Louis Fed in 2013. Read more about the author's work. The standard of living is a measure of the material aspects of a national or regional economy. It counts the amount of goods and services that are produced and available for purchase by a person, family, group, or nation. Definition of the Standard of LivingThe standard of living is different from other measures of quality of life. These often include non-material characteristics, such as relationships, freedom, and satisfaction. Indices that attempt to measure quality of life also include the material standard of living measurement. Standard of living is narrowly focused on the value of goods and services produced and consumed. Key Takeaways
How the Standard of Living Is MeasuredThe generally accepted measure of the standard of living is GDP per capita. This is a nation's gross domestic product divided by its population. The GDP is the total output of goods and services produced in a year by everyone within the country's borders. Real GDP per capita removes the effects of inflation or price increases. Real GDP is a better measure of the standard of living than nominal GDP. A country that produces a lot will be able to pay higher wages. That means its residents can afford to buy more of its plentiful production. Flaws in GDP per Capita as Measure of Standard of LivingGDP per capita doesn't count unpaid work. Unpaid work includes critical activities like in-home child or elder care, volunteer activities, and housework. Many activities that are included in GDP couldn't occur if there weren't these support activities. GDP per capita doesn't effectively measure pollution, safety, and health. For example, the government may encourage the development of an industry that spews chemicals as part of its manufacturing process. Elected officials only see the jobs created, and the standard of living measurement only counts the value of the goods produced. The costs of polluted air and water may not be recognizable until decades later. Finally, the GDP per capita measurement assumes that production, and its rewards, are divided equally among everyone. That's because it's an average and ignores income inequality. It can report a high standard of living for a country where only a few people at the top enjoy the wealth. Factors That Determine a Nation's Standard of LivingThe factors that affect the standard of living are the same ones that affect GDP. The most important is consumer spending, which makes up 68% of the U.S. economy. When people buy groceries, gasoline, and clothing, their lives improve. That activity helps businesses, which then hire more employees. The other three components of GDP are business investment, government spending, and net exports. Business investment includes new plants and equipment, real estate, and products. If companies are investing, the economy improves. The same is true of government spending. When governments build roads, bridges, and public transit, its citizens benefit from a higher standard of living. That's especially true for direct payments, such as Social Security and Medicare. People's lives are better because of these benefits. Net exports improve a country's standard of living in less obvious ways. If a country exports more than it imports, it creates jobs. Other Ways to Measure Quality of LifeThe World Bank uses a very similar measure called Gross National Income per person (GNI per capita). It measures the level of income paid to all the country's citizens, no matter where they are in the world. GDP per capita only measures the income paid to those residing in the country’s borders. GNI per capita can raise a country’s standard of living. That’s because many citizens live in other countries to get better jobs. They also remit part of their wages back to their families at home. The United Nations uses the Human Development Index. It includes the following four data points:
NoteSince the U.N. compares GDP between countries, it uses purchasing power parity. That adjusts for differences in exchange rates. The U.N. uses the index to question national priorities. It asks how two countries with similar GNIs per capita have different human development scores. Gallup's Standard of Living Index is a U.S. survey. It asks Americans if they are satisfied with their current standard of living. It asks them whether it’s getting better or worse. This is an extremely subjective measure, since it’s an attitudinal measurement. Countries With the Highest Standard of LivingThe standard of living by country depends on who's doing the measuring and how it's being measured. The CIA World Factbook ranks every country in the world using GDP per capita. For 2017 the rankings revealed:
The World Bank's ranking uses gross national income per capita:
The U.N.'s Human Development Index offers a different result:
Frequently Asked Questions (FAQs)What countries have a high standard of living?Standard of living is measured in different ways, but some countries that consistently come up high include Switzerland, Denmark, Netherlands, Finland, Iceland, Austria, and Germany. What are some of the effects of a low standard of living?Issues that are brought on by a low standard of living include lack of access to nutrition, lack of medical care, poor sanitation, lack of transportation, inadequate housing, inability to access education opportunities, weak societal and family bonds, and mental health issues. Has the U.S. standard of living improved?In the long term, the U.S. standard of living has improved. Still, there are some vital numbers to watch. After five years of the poverty rate going down in the U.S., it rose in 2020. The official U.S. poverty rate was 10.5% in 2019, but in 2020 it was up to 11.4%. How does GDP affect the standard of living?However, economists often make adjustments to GDP, such as using real GDP, or use alternative methods for determining the standard of living. Generally, rising global income translates to a higher standard of living, while diminishing global income causes the standard of living to decline.
Does increase in GDP mean increase in standard of living?Broadly shared growth in per capita GDP increases the typical American's material standard of living. But GDP is not meant to be a measure of economic welfare, and other considerations are important in fully assessing the costs and benefits of policy changes.
Why does economic growth improve living standards?Growth can lead to higher living standards because if GDP rises, there is more money in the domestic economy. This means that business can make more profits, and therefore can pay employees higher wages, or even hire more employees. This means that GDP per capita/ household rises.
Why real GDP gives a better measure of growth improvements in living standards over time than nominal GDP?Why Do Economists Favor Real GDP? Real GDP is often favored over nominal GDP as it accounts for the effects of inflation. Thus, if nominal GDP grew at 4% in a given year, but the inflation rate was 5%, it actually shrunk by 1% in real (constant-dollar) terms.
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