4.2.1 The measurement of macroeconomic performance
Evaluate the view that economic growth leads to an improvement in living standards [25 marks]
Economic growth refers to the increase in the value of production of good and services in an economy over a period of time. Although an increase in economic growth does improve aspects of living standards (unemployment and income), other aspects may be deteriorating, for instance, the quality of life of population.
Improved living standards, ceteris paribus, may be done to greater economic growth. Real GDP measures economic growth and therefore, when GDP per capita increases, we can see trends introducing unemployment. For example, when economic activity is high, more production happens overall and therefore labour, as it is an example of derived demand, will be demanded more. This would therefore decrease unemployment, as more jobs will be created.
Moreover, economic growth tends to increase greater government tax revenue. Government are able to spend more on public services and the provision of merit goods(education and healthcare). Roughly, 20% of the UK's annual budget is spent on the NHS which highlights how significant contributions can really be made to improve physical/mental heath, effectively living standards, by increasing economic growth.
In countries like India and China, economic growth can lead to a reduction in absolute poverty. In countries like India and China, economic growth can lead to a reduction in absolute poverty. India is a really nice example because India's economy has grown over the last few decades by 6/7% annually. For example, Data from the World Bank shows how between 2011 to 2019, India reduced its population of people in extreme poverty from 22.5% to 10.2%, as a result from economic growth. It is also important to point out how negative externalities are more common due to economic growth.
Additionally, economic growth may act as a facade, hiding deep-rooted inequality. The Gini coefficient, a measure of inequality, has increased rapidly in many of the developed nations. In America, the top 1% has a disproportionate share of economic gains.
There are also limitations of using real GDP to measure living standards. For instance, GDP doesn’t measure non-market activities such as family care and well-being. Alternative measures such as the HDI (Human Development Index) and the happy planet index provide a greater overview of living standards. Furthermore, grown over the last few decades. India’s steady growth in GDP per capita has led to a stark decline in poverty. For example, between 1993 to 2011, India reduced its population of people in extreme poverty from 45% to 21%. As a result, living standards significantly increased due to a growth in income. This improvement is not just a positive economic externality that also fuels wider economic growth and the development of India.
There are also limitations to using real GDP as an indicator of living standards. GDP does not account for non-market activities such as family care and volunteering, which contribute significantly to societal well-being. Alternative measures like the Human Development Index (HDI) and the Happy Planet Index (HDI) provide a more comprehensive assessment of quality of life. Furthermore, economic well-being extends beyond GDP, incorporating material prosperity and overall life satisfaction. A country experiencing high economic output may still have low well-being due to factors such as poor work-life balance. For example, although economic output may rise, job satisfaction could remain low due to long working hours or workplace stress.
Government corruption is another critical factor affecting living standards, particularly in relation to labor conditions. Economic growth is also country-specific; Less Economically Developed Countries (LEDCs) require rapid growth to prevent falling further behind wealthier, more established nations. However, for growth to be beneficial in the long run, it must be sustainable.
Norway exemplifies this balance, ranking highly on the HDI due to substantial investment in education and healthcare, which improves overall living standards. It also highlights the significance of purchasing power parity (PPP): $1,000 in Norway does not hold the same value as $1,000 in India. Disposable income plays a crucial role in determining living standards; if real GDP rises while inflation remains stable, purchasing power increases, allowing people to afford more goods and services.
There is a general trend of higher income leading to greater life satisfaction. However, concepts like the Easterlin Paradox and diminishing marginal returns challenge this notion, suggesting that beyond a certain point, additional income has a limited impact on happiness.
Overall, disposable income serves as a key indicator of living standards and provides insight into a country's economic performance relative to others. Median disposable income, in particular, helps assess income distribution and inequality. However, it is essential to recognize that economic growth does not always translate into improved living standards. Negative externalities, such as environmental degradation and excessive working hours, may emerge as a consequence of rapid growth. Additionally, some countries may be operating at a positive output gap, indicating an unsustainable level of production that could lead to inflationary pressures and economic instability.
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