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 Living
The 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.
- Standard of living is the amount of goods and services available to purchase in a country.
- Real GDP per capita and Gross National Income per capita are the two most common ways to measure the standard of living.
- GDP measures all transactions within a country's boundary, while GNI includes those who live abroad.
- Standard of living only measures the wealth of material things its citizens have, but not quality of life.
- These measurements do not account for aspects such as environmental costs, non-economic contributing tasks, or income inequality.
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.
Flaws in GDP per Capita as Measure of Standard of Living
GDP 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 Living
The 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 Life
The 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:
- Life expectancy at birth
- School enrollment
- Adult literacy
- 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.
Countries With the Highest Standard of Living
The 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 highest was Luxembourg, at $117,846.1 per person.
- The lowest was Burundi, at $771.2 per capita.
- The United States ranked 11th at $63,206.5 per capita.
The World Bank's ranking uses gross national income per capita:
- Macao SAR, China is highest at $117,450 per capita.
- Burundi is the lowest at $780 per capita.
- The United States is 11th at $64,210 per capita.
The U.N.'s Human Development Index offers a different result:
- Norway is highest, with a score of 0.957.
- Niger is the lowest with a score of just 0.394.
- The United States is 17th, at 0.926.
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%.