3.1(1) Standard of Living

Question 1

Standard of living

Answer 1

The well-being of residents in the economy.

(can be split into material and non-material SOL)

Question 2

Material standard of living

Answer 2

Amount of goods and services available for consumption by the residents of an economy.

Question 3

Non-material standard of living

Answer 3

Intangible aspects of well-being.

Question 4

Gross Domestic Product (GDP)

Answer 4

Total monetary value of all final goods and services produced by factors of production located within the geographical boundary of a country in a given time period.

Question 5

Gross National Income (GNI)

Answer 5

Total monetary value of all final goods and services produced by the residents of a country in a given time period.

Question 6

What is an equation connecting GDP and GNI?

Answer 6

GNI = GDP + Net factor income from abroad

Question 7

What is net factor income from abroad?

Answer 7

Income citizens earn working overseas minus income paid to non-citizens locally

Question 8

What are the purposes of national income statistics (GDP & GNI)?

Answer 8

1. Measuring the size of a country’s economy
2. Measuring a country’s economic performance
3. Forecasting future trends

Question 9

Which indicator(s) should be used to compare mSOL over TIME?

Answer 9

Real GDP per capita

Question 10

Which indicator(s) should be used to compare mSOL over SPACE?

Answer 10

1. Market exchange rate
2. PPP exchange rates

(MER/PPP-adjusted GDP per capita)

Question 11

What is the difference between ‘real’ and ‘nominal’?

Answer 11

Real: Constant prices, effects of inflation removed
Nominal: Actual prices at a given time, effects of inflation remain

Question 12

What does the term ‘per capita’ mean?

Answer 12

Per person (divide statistic by population size)

Question 13

What are 2 methods to convert nominal to real output?

Answer 13

1. Real Growth = Nominal Growth - Inflation Rate
2. Real GDP = Nominal GDP / GDP deflator x 100

Question 14

When should the 2 methods to convert nominal to real output be used respectively?

Answer 14

1. Real Growth = Nominal Growth - Inflation Rate
   (Percentage values)
2. Real GDP = Nominal GDP / GDP deflator x 100
   (Absolute values)

Question 15

What does a GDP deflator represent?

Answer 15

Average price level of a basket of goods and services

Question 16

What is the market exchange rate based on?

Answer 16

Demand of country’s currency

Question 17

Explain the use of PPP exchange rates to compare mSOL over space.

Answer 17

Comparing the price of a common basket of goods between 2 countries.

Question 18

What does PPP stand for?

Answer 18

Purchasing Power Parity

Question 19

What are the limitations of using the market exchange rate to compare mSOL over space?

Answer 19

1. Prone to fluctuations
   Change in MER-adjusted GNI could be either (1) change in actual output or (2) exchange rate –> inaccurate representation of mSOL
2. Does not reflect relative purchasing power/cost of living
   Inaccurate representation of mSOL

Question 20

What are the limitations of using PPP exchange rates to compare mSOL over space?

Answer 20

1. Difficulty finding a “common basket of goods”
   Due to different situations (e.g. climate, level of development)
2. Resource-intensive
   Significant time and effort required to compile and monitor prices of a large amount of goods and services

Question 21

What are the 3 limitations of mSOL indicators?

Answer 21

1. Inaccurate calculations
2. Interpretation issues (mSOL)
3. Interpretation issues (nmSOL)

Question 22

Elaborate on ‘inaccurate calculations’ as a limitation of mSOL indicators.

Answer 22

– Data collection problems
Inaccuracies and mistakes during data collection process –> overstate/understate mSOL

– Underground activities
Not declared and thus not counted into national income (e.g. illegal activities, moonlighting) –> understate mSOL

– Non-marketed activities
Not monetised/advertised (e.g. subsistence farming) –> understate mSOL

Question 23

Are inaccurate calculation (as a limitation of mSOL indicators) more prevalent in DCs/LDCs?

Answer 23

LDCs
– Fewer resources which are usually allocated to more pressing issues

Question 24

Elaborate on ‘interpretation issues (mSOL)’ as a limitation of mSOL indicators.

Answer 24

– Income distribution
The larger the income inequality, the larger the overstatement of mSOL
* Gini coefficient: Measures income inequality, >0.4 = unhealthy figure

– Composition of output
Direct contribution of current mSOL: Consumer expenditure, government expenditure (healthcare), import expenditure
No direct contribution to current mSOL: Investment expenditure, government expenditure (national defence), export revenue
»> If output largely composed of these, mSOL overstated.

Question 25

Elaborate on 'interpretation issues (nmSOL)' as a limitation of mSOL indicators.

Answer 25

-- Leisure and stress levels High stress levels: nmSOL is low despite high mSOL --> overstatement of nmSOL -- Negative externalities (As a result of economic growth) Overstatement of nmSOL -- Literacy rate Normally positively related to real GDP per capita -- Life expectancy Can overstate SOL -- Political stability, public safety...

Question 26

What is a limitation of GDP specifically?

Answer 26

Reliability in developing countries Situation 1: Receives much more foreign investment than it gives -- GDP consists of lots of money from overseas and this is barely cancelled out by their own foreign investment --> GDP overstates SOL (economic welfare) Situation 2: Many citizens work overseas -- GDP does not consist of their income --> GDP understates SOL (economic welfare)

Question 27

What is a nmSOL indicator?

Answer 27

HDI (Human Development Index)

Question 28

What does HDI measure?

Answer 28

1. Health (nmSOL) --> life expectancy 2. Education (nmSOL) --> adult literacy rates, expected years of schooling 3. Economy (mSOL) --> PPP-adjusted real GNI per capita