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GDP / GNI as a measure of living standards

Introduction

This lesson looks at the difference between GDP and GNI, which many economists believe is the more accurate measure of a nation's wealth.  Lastly, the page illustrates the importance of factoring in the differences to living costs and the size of the population when making a comparison of living standards between one country and another and between the same country over time.

Enquiry question

Are national income statistics an accurate measure of a nation's living standards?  Why do economists also adjust GDP / GNI figures for inflation and the size of the population when considering changes to living standards in a country?

Lesson time: 1 hour

Lesson objectives:

Distinguish between the nominal value of GDP and GNP / GNI and the real value of GDP and GNP / GNI and the difference between total GDP / GNI and GDP / GNI per capita.

Understand the extent to which GDP figures are an accurate measure of the living standards of a nation?

Teacher notes:

1. Beginning activity - begin with the opening activities and allow 10 minutes for your classes to complete this.

2. Practise activities - included on the handout should take around 30 minutes.  These are short answer exercises, some theoretical and activities 1-6 are designed for both SL and HL

3. The Big Mac index - while some IB students may think that this activity sounds more of a comical exercise it can be a fairly accurate measure of living standards in a city.  Before showing the powerpoint have your classes complete a ranking for their own city, based on the average wage and the price of a Big Mac - which many of your classes will know.  (10 minutes)

4. Reflection exercise -  this simulation is a fun way to complete the lesson and contains some relevant points for discussion e.g. the shift in balance of power between Asia, Europe and then the USA  Are we currently witnessing a shift in power once again? (10 minutes)

Key terms

Bigmac index - an index used to measure the purchasing power parity (PPP) between two currencies.

Purchasing power parity - a theory that measures the average price level in different countries and is widely used when comparing the GDP of different countries.

OECD better life index - an index which allows economists to compare well-being across countries, based on 11 topics e.g. quality of housing, average income levels as well as access to education and health services.

Happiness index - a landmark survey of the state of global happiness that ranks 156 countries by how happy their citizens.

Happy planet index - measures what matters: sustainable wellbeing for all. It tells us how well nations are doing at achieving long, happy, sustainable lives.

Activity 1

Countries A, B and C are three nations within Europe in the year 2021.

GDP (million US $)

GNI (million US $)

Population

GNI per capita (US $)

Country A

3,158,938

3,318,947

67,886,011

48,890

Country B

2,923,489

2,993,443

65,273,511

45,860

Country C

2,062,649

1,872,339

145,934,462

12,830

 Compare the living standards of the 3 European nations listed.

 

Country A (UK) has the highest GNI per capita and might claim therefore to offer the highest quality of life of the three nations.  However, in reality, the difference between the UK (country A) and country B (France) is not particularly significant and so we cannot say with any degree of certainty that country A has a higher quality of life than B.  Perhaps living in country A costs more to live than in B?  

While this also applies to country C (Russia), in reality, the difference in GNI per capita between country C and the other two is so significant that we probably can say with a degree of certainty that both the UK and France offer a higher standard of living than country C.

The activities on this page can be downloaded as a PDF file at:  GDP as a measure of living standards

Activity 2: Using GDP to measure living standards

Start by watching the following video which explains a little more about how national income is calculated and then complete the accompanying questions:

Questions

(a) How do economists avoid the difficulties associated with double counting when measuring the size of an economy?

Economic statisticians calculate only the value-added at each stage of the production process, rather than the selling price of the good or service.

(b) What is the difference between GDP and GNI?

GDP measures only the value of all goods and services produced within the borders of that nation.  GNP or GNI adds net property income from abroad.

(c) To what extent does GDP represent living standards within a nation?

Gross domestic product measures the total value of all goods and services in the economy - i.e. how rich a nation is.  However, a far more accurate measure of living standards is the GDP / GNP per capita.  Even this measure, however, has limitations.

Activity 3: Link to TOK

The following data table illustrates the yearly average wage for a range of nations, with all prices adjusted for the differences in the cost of living between nations - all figures are for 2022 and were taken from the OECD statistics.

World rank NationAverage wage (US $)
1Switzerland80,620
4USA64,554
15UK39,700
26Spain27,360
30Greece17,930
34Poland15,240
70Mexico8,480

To what extent does the average wage of a nation represent the living standards in the economy?

There is little doubt that average wages (especially when the figures are adjusted for differences in the cost of living between nations) are a significant indicator of living standards between nations.  However, there are a number of other variables which must be considered when comparing the standard of living between different nations.  Examples include the level of income inequality within the economy, working hours, employment rates as well as non-financial variables such as access to high-quality health and education services, levels of crime and air quality.  For example, rapid economic growth caused by rapid industrialisation will often come with a high environmental cost which leads to significant reductions in the quality of life.

Activity 4: Differing wage levels between nations

Click on the link showing average wage levels in Europe: Average wage

Provide possible reasons for the sharp disparity in income levels between different nations living on the same continent?

Activity 5: adjusting GDP for differences in living costs

The table includes 6 nations with the highest GDP per capita, as well as the cost of living index.  Complete the table by adjusting the GDP figures for the differences in the cost of living between nations.

GDP per capita rankCountryGDP per capita ($2022)Cost of living index (USA=100)GDP adjusted for prices ($)
1Luxembourg101,994116

87,925 (101,994 / 1.16)

2Switzerland80,603159

50,693

3Norway74,598122

61,145

4Qatar68,940126

54,714

5Ireland61,206103

59,423

6USA56,084100

56,084

 Why is the final column a more accurate reflection of living standards than a mere comparison of GDP data?

Activity 6

(a) Complete the following table for country X.

YearGDP m$InflationGDP growthReal GDP growth
20202,5954%--
20212,6302%

1.35% ((2,620-2595) / 2,595) x 100

(0.65%) - GDP growth - inflation rate

20222,7120%

3.11% ((2,712-2630) / 2,630) x 100

 

3.11%

20232,9891%

10.21%

9.21%

Activity 7: Alternative measures of economic living standards

The Big mac index can also be used to compare living standards between nations with the index measuring how long it takes for the average worker to save sufficient money to purchase a Big mac in their own country.  The shorter the time period then the wealthier the nation is likely to be and this measure, set up initially as a bit of fun is actually surprisingly accurate when compared with other measures of income.

How long does it take employees in different cities to afford a Big Mac?

Before watching the following powerpoint calculate the length of time that it takes the average worker to purchase a Big Mac in your city?  To do this divide the average hourly wage by the price of a Big Mac in your country.  You will be surprised how accurate your calculation can be.

The powerpoint is available at: Bigmac index

Activity 8: Happy planet index

Which are the happiest nations on earth?  Find out from the following link: Happy nations

Activity 9: A comparison of GDP over time

End this lesson by enjoying the following short video which shows the world's largest economies, relative to average prices, between 1880 to 2040. 

What were the most significant things that you learnt from this video?

Hint:

The early 19th century was dominated largely by India and China but were overtaken by USA and Europe during the 20th century.  The 21st century then saw the re-emergence of both nations and European nations have suffered as a consequence of the two great wars of the 20th century.