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Discuss the extent to which the Human Development Index (HDD and the Measure of Economic Welfare
(MEW) provide better measures of living standards than Gross National Income (GNI). [25]

Cambridge A LEVEL June 2021 Paper 4

Quick Answer:

Standard of living is a measure of quality of life of the inhabitants of a country.

The baseline measure of the standard of living is Gross National Income (GNI) This is the value of total income earned by the use of all resources located within the political borders of a country plus net property income from abroad over one year time period Il is believed that there should be a strong posi tive correlation between GNI and economic wellbeing, that is, greater income should move society towards” the good life” and vice versa.

Therefore economists view levels and rates ot growth of GNI as a useful indicator of quality of life.

However, if we are to make sensible use of GNI figures, wc must take inflation and size of popula tion into account.

Increasing price level, for in stance may increase the GNI figure more than the increase in output therefore wc need to factor in the changes in price level and calculate real GNI.

Similarly, a higher real GNI docs not necessarily imply that the citizens of the country enjoy a better quality of life This is because it ignores the size of its population Real GNI per head, therefore, can be more useful Real GNI per head is calculated by dividing real GNI on the total population ol the country It is an average measure of how much of real income each and every citizen earns during a certain time period Economists view levels and rates of growth of "real" per capita GNI, as a better indicator of standard of living.

However, even after making these adjustments economists question its reliability as an indicator of living standard They argue that these figures hide significant regional variations in output, em ployment and incomes per head of population.

Within each region there are also areas of relative prosperity contrasting with unemployment, black spots and deep-rooted social and economic deprivation.

Furthermore, on their own GNI figures do not show the distribution of income and the uneven spread of financial wealth.

Incomes and earnings may be very unequally distributed among the population and rising national prosperity can still be accompanied by rising relative poverty.

In addition a higher degree of inaccuracy caused by a large size of the informal economy makes RGNI is of limited value.

The informal or black economy includes economic activity that goes unrecorded.

The non-monctised sectors of the economy include output that is not sold at market prices but involves barter trade, and self-consumed products Economist's latest estimates for the total value of the black economy throughout the world are over $ 10 trillion The scale of the underground economy is estimated to average 15% of national output for rich economics and 33% of national output for emerging economics.

There is also the problem of what rate of exchange to use when converting GNI figures in a common currency 1 he day to day market exchange rate can bear little relation to relative prices in different countries.

So prices in some countries, like Swit zerland or West Germany, can be much higher at official exchange rates than in France or Italy Ihercforc it real GNI per capita is to be used to determine living standards of a country it is impor tant to use an exchange rate which compares its cost oi living with other countries.

These exchange rates are known as purchasing power panties For instance, if a typical basket of goods costs Rs.

100 in Pakistan and £1 in the UK, then GNI of Pakistan should be converted at an exchange rate of Rs 100 to the £1 - even if the market exchange rate gives a very different figure.

Even this is not accurate enough In some coun tries.
consumers have to purchase goods which in others are free.

For instance, Sweden spends a greater proportion of its national income than Italy on fuel lor heating because of its colder climate.

But this extra expenditure docs not give the Swedes a higher standard of living Again, coun tries are different geographically and one country might have higher transport costs per unit of output than another because of congestion or having to transport goods long distances.

In prac tice, it is almost impossible to adjust GNI figures for these sorts of differences.

Il is believed that the numbers cannot capture our true overall well-being as a nation Economists point out that many qualitative changes could make a country belter off than other countries without necessarily achieving higher RGNI per head, such as reduction of crime and violence, greater equality of opportunity, improved racial harmony, and reduction of drug and alcohol abuse.

Similarly, a rising RGNI per head is usually accom panied by rising external cost, such as pollution, noise and accidents These are not officially mea sured within national income but they do affect the quality of life of a nation.

In lieu of all these limitations of RGNI as a measure of living standard economists have developed some more comprehensive alternative methods.

One such alternative measure is known as Mea sure of economic welfare (MEW), fins starts with GNI To this we add an allowance for leisure, for various non-marketed goods and services such as housework and underground activities, for the services of various public amenities such as parks and roads, and for private durable goods such as furniture and jewellery On the other hand, various items are subtracted These included regrcttables such as expenditure on defence and commuting to work, and various 'bads' such as pollution Also various intermediate items such as the benefits of education are sub tracted fhc big problem with using MEW is in obtaining reliable estimates of all the additional items it includes.

As a result it has not been adopted by governmental statistical agencies around the world The most well-known measure of quality of life is fhc Human Development Index (HDI) that has been developed under the United Nations Devel opment Programme The Human Development In dex (HDI) is the average of three indicators • Standard of living, as measured by real GNI per capita

• Life expectancy at birth, in years
• Educational attainment, as measured by a weighted average of adult literacy (two-thirds weight) and enrolment ratio (one-third weight) the closer the HDI is to 1, the closer the country is to achieving the maximum values defined for each of the three indicators.

The advantage of using HDI is that it highlights the fact that people’s welfare is influenced not only by the goods and services available but also by their ability to lead a long and healthy life and to acquire knowledge, a combination of both qualita tive and quantitative factors Clearly, this index gives us a better way of estimating standards of living than GNI taken on its own.

However, it is still far from perfect Economists have recently been looking at ways to include other factors in the measurement, such as income distribution, gender inequalities, and inequalities by region or by ethnic group As a result they have developed The Human Poverty Index (HPI) that focuses on four basic dimensions of human life — longevity, knowledge, economic provisioning and social in clusion.

Hence it follows that GNI is an integral part of any measure of quality of life.

However, on its own it proves to be insufficient.

A more comprehensive measure of living standard must consider the data on all important quantitative and qualitative factor.

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