Standard of Living

Where's the Best Standard of Living? Depends Who You Ask.

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The standard of living is a measure of the material aspects of an economy. It counts the amount of goods and services produced and available for purchase by a person, family, group, or nation.

The standard of living is different from the quality of life. It doesn’t measure non-material characteristics, such as relationships, freedom, and satisfaction. These are part of the quality of life. Indices that attempt to measure quality of life also include the material standard of living measurement.

How the Standard of Living Is Measured

The 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.

GDP per capita has three flaws. First, it doesn't count unpaid work. That includes critical components 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.

Second, it doesn't measure pollution, safety, and health. The government may encourage an industry that spews chemicals as part of its manufacturing process. The elected officials only see the jobs created. The cost may not come to roost until decades later.

Third, the GDP per capita measurement assumes that production, and its rewards, are divided equally among everyone. It ignores income inequality. It can report a high standard of living for a country where only a few enjoy it. 

Factors Affecting the Standard of Living

The factors that affect the standard of living are the same ones that affect GDP. The most important is consumer spending. It makes up 70% of the U.S. economy. When people buy groceries, gasoline, and clothing, their lives improve. It helps businesses, who 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 Measures

The World Bank uses a very similar measure, GNP per capita. That's gross national product per person. 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. GNP 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 measures the following four data points:

  1. Life expectancy at birth.
  2. School enrollment.
  3. Adult literacy.
  4. Gross national income per capita.

Since 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.

Redefining Progress uses the Genuine Progress Indicator for the United States. It starts with GDP, then adjusts for crime, volunteer work, income inequality, and pollution. 

Standard of Living by Country

The standard of living by country depends on who's doing the measuring and how it's being measured. Here are the most recent highest and lowest ranked countries, with links to the full listing.

The CIA World Factbook ranks every country in the world using GDP per capita. In 2017, the highest standard of living was in Liechtenstein, with $139,100 per person. The lowest was Burundi, at $700 per capita. The United States ranked 19th at $59,500 per capita. 

The World Bank's ranking uses gross national income per capita. It lists Qatar as highest at $128,060 per capita and Liberia as lowest at $710 per capita. The United States is 12th at $60,200 per capita.

The U.N.'s Human Development Index lists Norway as highest, with a score of 0.953. Niger is the lowest with a score of just 0.354. The United States is 13th, at 0.924. 

The Bottom Line

Real GDP per capita is the best way to measure a country’s standard of living. It removes the effects of price increases. But GDP isn’t a perfect measure because:

It doesn’t include the value of unpaid support work such as volunteer work, housework, and care for children and the elderly.

It does not take into account income inequality. A high GDP per capita value may actually be enjoyed only by a small sectoral percentage.

Ignores the status of the nation’s health, environmental conditions, and population security.

Standard of living only measures the wealth of material things its citizens have. It does not measure their quality of life. Quality of life encompasses a broader range that includes citizens’ satisfaction levels, the freedoms they enjoy, their mental and physical well-being, and much more. As such, a high score in the standard of living may not equate to a similar score reflecting general happiness and contentment.

Article Sources

  1. The World Bank. “Beyond Economic Growth: an Introduction to Sustainable Development (English),” Accessed Jan. 7, 2020.

  2. Federal Reserve Bank of Boston. “How Do We Measure Standard of Living,” Accessed Jan. 7, 2020.

  3. Corporate Finance Institute. “Gross National Product,” Accessed Jan. 7, 2020.

  4. United Nations Development Programme. “Human Development Index (HDI),” Accessed Jan. 7, 2020.

  5. The World Bank. “GNI Per Capita, PPP (Current International $),” Accessed Jan. 7, 2020.

  6. United Nations Development Programme. “Global Human Development Indicators,” Accessed Jan. 7, 2020.

  7. Gallup. “U.S. Standard of Living Index Climbs to Highest in 7 Years,” Accessed Jan. 7, 2020.

  8. Community Indicators Consortium. “Redefining Progress: Genuine Progress Indicator,” Accessed Jan. 7, 2020.

  9. Central Intelligence Agency. “The World Factbook,” Accessed Jan. 7, 2020.

  10. The World Bank. “GNI per Capita, PPP (Current International $),” Accessed Jan. 7, 2020.

  11. United Nations Development Programme. “Human Development Data (1990-2018),” Accessed Jan. 7, 2020.

  12. Forbes. “Quality of Life: Everyone Wants It, But What Is It?” Accessed Jan. 7, 2020.