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GDP and living standards

When we think what our future economy will be like for the next generation, we naturally consider its growth. It is growth that is necessary for living standards to continually improve, leading to an even better way of life for the next generation.

Have you ever asked yourself the following questions when considering living standards?

  • Why do some countries enjoy higher living standards than others?
  • Why do some countries develop faster than others?
  • Why have all industrialised countries, such as Australia, enjoyed rising living standards over time despite some bumps along the way?

We will answer these questions in the next few steps. Let’s first look at why some countries enjoy higher living standards than others. We will begin by defining what is meant by living standards.

Living Standards and the GDP

A good place to start defining the concept of ‘living standards’ is to look at the Gross Domestic Product (GDP) which represents the nation’s output of goods and services over a period of time, say a year.

We can think of GDP as the national economic cake that is made up of several slices as seen in the pie chart below. Each slice represents a group in society who consumes goods and services. Can you guess what these groups are?

GDP Pie Chart

The groups represented by the slices of the GDP Cake are as follows:

  • Households: The biggest slice (60% of the cake) is goods and services consumed by households and purchased from the private sector (everything from food, clothing, travel, entertainment).

  • Companies/Firms: One of the second largest slices is capital goods used by firms (such as computers, transport vehicles, buildings).

  • Government: The other second largest slice is goods and services purchased by governments (such as health, education, policing).

  • Export Market: The remaining slice is goods and services for export (minerals, agricultural products, higher education).

GDP indicates what we have been able to produce with the nation’s resources and it is a key driver of living standards. The larger the GDP, the higher the living standards tend to be, over time, which is why some countries enjoy higher living standards than others.

Also, why do some countries develop faster than others? We must ask the question, what drives GDP (which results in economic growth over time)? There are two broad factors:

  • more workers (employment growth)
  • each worker becoming more productive on average (labour productivity growth). This depends on technological change, more and better capital equipment, and better skills of workers.

In the next step we will take a look at what labour productivity is and the impact it has on our living standards.

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This article is from the free online course:

Exploring Economics: Will the Next Generation Be Worse Off?

Griffith University