Explain the reasons for differences in living standards and income distribution within and between countries.
Key Concepts
Living standards – measured by real GDP per capita, GNI per capita, HDI, etc.
Income distribution – how a country’s total income is shared among its population.
Factors influencing living standards: natural resources, human capital, physical capital, technology, institutions, geography, trade openness, macro‑economic stability.
Factors influencing income distribution: education, skill levels, labour‑market institutions, tax policies, social welfare, historical legacies.
Why Living Standards Differ Between Countries
Resource endowment – countries with abundant natural resources (oil, minerals) can generate higher incomes, but the “resource curse” shows that governance matters.
Human capital – investment in education and health raises productivity. Example: \$GDP = A \cdot K^{\alpha} L^{1-\alpha}\$ where \$A\$ represents technology and human capital.
Physical capital – stock of machinery, infrastructure; higher capital stock raises output per worker.
Technology and innovation – diffusion of new technologies boosts productivity.
Institutions and governance – property rights, rule of law, low corruption encourage investment.
Geography and climate – disease burden, access to sea routes, agricultural potential.
Trade openness – access to larger markets and cheaper inputs can raise income.
Access to capital – entrepreneurs in some areas can invest more.
Discrimination – gender, ethnicity, or caste can limit earnings.
Regional policy differences – devolved fiscal powers can create varied public services.
Measuring Living Standards
Indicator
What it measures
Strengths
Limitations
Real GDP per capita
Total output adjusted for inflation, divided by population
Widely available, comparable
Ignores distribution, non‑market activities
GNI per capita
Gross national income, includes net income from abroad
Reflects external earnings
Same distribution issues
Human Development Index (HDI)
Composite of life expectancy, education, GNI per capita
Broad view of welfare
Weighting choices, limited depth
Multidimensional Poverty Index (MPI)
Deprivations in health, education, living standards
Captures non‑income poverty
Data intensive
Measuring Income Distribution
Measure
Definition
Interpretation
Gini coefficient
Area between Lorenz curve and line of equality
0 = perfect equality, 1 = perfect inequality
Quintile share ratio
Income share of top 20 % ÷ income share of bottom 20 %
Higher ratio = greater inequality
Palma ratio
Income share of top 10 % ÷ income share of bottom 40 %
Focuses on extremes
Case Study Comparisons
Below is a simplified comparison of three countries to illustrate how the factors above translate into different living standards and income distributions.
Country
Real GDP per capita (US$)
Gini coefficient
Key drivers of high living standards
Key drivers of inequality
Country A (high‑income)
55,000
0.30
Advanced technology, strong institutions, high human capital
Progressive tax system, strong welfare state reduces inequality
Resource‑curse effects, weak institutions, limited access to education
Discussion Questions
How might a country with abundant natural resources achieve a high standard of living without falling into the “resource curse”?
Explain why two countries with similar GDP per capita can have very different Gini coefficients.
Assess the role of education policy in reducing regional income disparities within a country.
What are the limitations of using GDP per capita as the sole indicator of living standards?
Suggested Diagram
Suggested diagram: Lorenz curve illustrating different Gini coefficients for a high‑income equal society versus a low‑income unequal society.
Summary
Differences in living standards between countries arise from a mix of resource endowments, human and physical capital, technology, institutions, geography, trade openness, and macro‑economic stability. Within countries, disparities are driven by education, urbanisation, labour‑market institutions, access to capital, discrimination, and regional policies. Measuring both living standards and income distribution requires a range of indicators, each with its own strengths and weaknesses.