Indicators of Living Standards (Cambridge International IGCSE Economics)

Exam board Cambridge International · IGCSEUpdated 2025-08-19

Real GDP per head (capita)

Spec point — advantages and disadvantages of real GDP per head and HDI as indicators

Economic development is the sustainable increase in living standards for a country, typically characterised by increases in life span, education levels, and income
There are many measures of living standards
- Single indicators, e.g., real gross domestic product per capita, number of doctors/1000 people; infant mortality rate, and % of the population with access to clean drinking water
- Composite indicators such as the Human Development Index (HDI)

The distinction between real, nominal and per head GDP

Nominal GDP

In economics, the use of the word 'nominal' refers to the fact that the metric has not been adjusted for inflation
Nominal GDP is the actual value of all goods and services produced in an economy in a one-year period
- There has been no adjustment to the amount based on the increase in general price levels (inflation)

Real GDP

Real GDP is the value of all goods and services produced in an economy in a one-year period - and adjusted for inflation
- For example, if nominal GDP is $100bn and inflation is 10% then real GDP is $90bn

Real GDP per head (capita)

This metric take the real GDP and divides it by the number of people in the population

$\mathrm{Real} \mathrm{GDP} \mathrm{per} \mathrm{capita}=\frac{\mathrm{rGDP}}{\mathrm{Population}}$

It shows the mean wealth of each citizen in a country
This makes it easier to compare standards of living between countries
- For example, Switzerland has a much higher GDP per capita than Burundi

The advantages and disadvantages of real GDP per capita

Advantages	Disadvantages
- Allows comparisons – helps compare living standards between countries or over time - Adjusts for population size – gives a better measure than total GDP alone - Useful indicator of economic growth – helps track whether an economy is growing or shrinking on a per-person basis - Inflation adjusted – when measured in real terms, it gives a clearer picture of changes in purchasing power	- Ignores income distribution – does not show how evenly income is shared among the population - Non-market activities excluded – ignores work like home care or informal sector jobs - Doesn’t show quality of life – doesn't measure health, education or environmental quality - Currency value differences – exchange rates can distort international comparisons

Advantages

Disadvantages

- Allows comparisons – helps compare living standards between countries or over time
- Adjusts for population size – gives a better measure than total GDP alone
- Useful indicator of economic growth – helps track whether an economy is growing or shrinking on a per-person basis
- Inflation adjusted – when measured in real terms, it gives a clearer picture of changes in purchasing power

- Ignores income distribution – does not show how evenly income is shared among the population
- Non-market activities excluded – ignores work like home care or informal sector jobs
- Doesn’t show quality of life – doesn't measure health, education or environmental quality
- Currency value differences – exchange rates can distort international comparisons

Exam Hint When an exam question uses the phrase 'at constant prices', it is referring to real GDP. For example, a question may read, 'Explain what is meant by a rise in GDP at constant prices.' This requires you to define real GDP and then explain the rise.

The human development index (HDI)

Spec point — advantages and disadvantages of real GDP per head and HDI as indicators

The Human Development Index (HDI) is a measure used to compare the development levels of different countries, not just based on income, but also on health and education
Developed by the United Nations, the Human Development Index is a combination of 3 indicators
1. Health – measured by life expectancy at birth
2. Education – measured by average years of schooling and expected years of schooling
3. Income, as measured by the real gross national income per capita at purchasing power parity (PPP)
Each indicator is given equal weighting in the index
The index ranks countries on a score between 0 and 1
- A score closer to 1 means a higher level of human development
- A score closer to 0 means a lower level of human development

Flowchart of Human Development Index; shows dimensions, indicators, dimension index including healthy life, education, life expectancy, income, GNI.

The components of the HDI

Examples of HDI values

Line graph showing Human Development Index from 1990 to 2020 for Austria, Bangladesh, Senegal, and world average. Austria is highest, Senegal lowest.

The Human Development Index scores from 1990 to 2021

Source: UNDP Data Centre

A value of less than 0.550 is considered low development, e.g. Senegal was at 0.514 in 2021
A value of 0.550-0.699 is considered medium development, e.g., Bangladesh was at 0.667 in 2021
A value of 0.700-0.799 is considered high development; e.g., Thailand was at 0.777 in 2021
A value ≥ 0.800 is considered very high development, e.g. Austria was at 0.918 in 2021

The advantages and disadvantages of using the HDI

One of the main advantages is that the HDI is a composite indicator which provides a more useful comparison metric than single indicators do

Advantages	Disadvantages
- It incorporates three of the most important metrics for households, i.e., health, education and income - It is widely used all over the world, which provides an opportunity for meaningful comparisons - It provides a goal for governments to use when developing their policies; e.g., it may help identify that the education levels are holding back improvements to the HDI, and government policy can target that - It provides citizens with an understanding of how their quality of life compares to other countries	- It does not measure the inequality that exists, as it uses the mean GNI per capita - It does not measure or compare the levels of absolute and relative poverty that exist - For many countries it does not provide useful short-term information, as gathering the data required for the calculation is difficult - This means the data often lags reality by several years

Advantages

Disadvantages

- It incorporates three of the most important metrics for households, i.e., health, education and income
- It is widely used all over the world, which provides an opportunity for meaningful comparisons
- It provides a goal for governments to use when developing their policies; e.g., it may help identify that the education levels are holding back improvements to the HDI, and government policy can target that
- It provides citizens with an understanding of how their quality of life compares to other countries

- It does not measure the inequality that exists, as it uses the mean GNI per capita
- It does not measure or compare the levels of absolute and relative poverty that exist
- For many countries it does not provide useful short-term information, as gathering the data required for the calculation is difficult

- This means the data often lags reality by several years

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Advantages	Disadvantages
- Allows comparisons – helps compare living standards between countries or over time - Adjusts for population size – gives a better measure than total GDP alone - Useful indicator of economic growth – helps track whether an economy is growing or shrinking on a per-person basis - Inflation adjusted – when measured in real terms, it gives a clearer picture of changes in purchasing power	- Ignores income distribution – does not show how evenly income is shared among the population - Non-market activities excluded – ignores work like home care or informal sector jobs - Doesn’t show quality of life – doesn't measure health, education or environmental quality - Currency value differences – exchange rates can distort international comparisons

Advantages

Disadvantages

Advantages	Disadvantages
- It incorporates three of the most important metrics for households, i.e., health, education and income - It is widely used all over the world, which provides an opportunity for meaningful comparisons - It provides a goal for governments to use when developing their policies; e.g., it may help identify that the education levels are holding back improvements to the HDI, and government policy can target that - It provides citizens with an understanding of how their quality of life compares to other countries	- It does not measure the inequality that exists, as it uses the mean GNI per capita - It does not measure or compare the levels of absolute and relative poverty that exist - For many countries it does not provide useful short-term information, as gathering the data required for the calculation is difficult - This means the data often lags reality by several years

Advantages

Disadvantages