Living Standards & Development Indicators

A 4-mark question on what influences living standards asks for two factors, with one mark for naming each and one for explaining it. Most of the reasons below compare one country with another; the last group explains why living standards also vary inside a single country.

Income and productivity differences

Richer countries can afford more goods, services, healthcare and education. The underlying cause is usually higher productivity (output per worker), driven by:

• More capital per worker (machines, infrastructure).
• Better technology.
• Higher human capital (education, training).
• Larger or more efficient markets.

Quality of human capital (education and healthcare)

Countries with good schools, universities and healthcare produce a workforce that is more productive and healthier. Both feed back into still higher productivity, in a virtuous cycle. Conversely, countries with weak education and high disease burden are trapped in low-productivity equilibrium.

Natural resources and technology

Two distinct paths to high living standards:

• Resource-rich countries (Norway with oil, Australia with minerals, Saudi Arabia with oil) can fund high public services from resource revenues.
• Technologically advanced countries (South Korea, Japan, Germany) export high-value manufactured goods and services that command high prices.

A country with neither (limited resources and low technology) finds it harder to lift living standards.

Political stability, governance, and institutions

• Stable politics encourages investment.
• Low corruption means public spending actually reaches public services.
• Strong rule of law protects property rights and contracts.
• Lower income inequality spreads the benefits of growth more widely.
• Effective government runs schools, hospitals and infrastructure well.

Even a country with abundant resources can have low living standards if its institutions are weak (the "resource curse").

Demographics and population structure

Countries with a large dependency ratio (many children and elderly per working-age adult) spread their output thinly. Countries with a healthy working-age share have higher per-capita output. Pop-growth differences also matter: if population grows faster than GDP, real GDP per head falls.

Why living standards differ within a country

The same national average hides big gaps between regions and between groups of people inside a single country.

• The urban-rural gap. Towns and cities usually have better infrastructure, more schools and hospitals, and a wider choice of higher-paid jobs. Rural households can therefore have a lower standard of living even where money incomes look similar.
• Regional economic differences. Industry, natural resources or access to a major port tend to concentrate in particular regions, so those regions have higher incomes and better-funded local services, while a region whose main industry has declined falls behind.
• Unequal access to public and merit goods. The quality of state healthcare and education varies from area to area and from group to group, so two households on the same income can still end up with very different health, schooling and quality of life.