Reasons for differences in living standards and income distribution within and between countries

Economic Development – Living Standards

Learning objective

Explain the reasons for differences in living standards and income distribution within and between countries, and evaluate the policies used to reduce poverty and inequality.

1. Measuring living standards

2. Measuring income distribution

3. Poverty – definitions (Cambridge syllabus 5.2)

• Absolute poverty: Living on less than a fixed monetary threshold – currently US $2.15 a day (2022 PPP) – considered insufficient to meet basic needs.
• Relative poverty: Living with an income below a set proportion of the median national income (commonly 60 % of median). It measures social exclusion rather than mere subsistence.

4. Causes of poverty (Cambridge syllabus 5.2)

• Unemployment or under‑employment
• Low wages and insecure contracts
• Illness, disability or lack of access to health services
• Age‑related factors (children, elderly)
• Environmental constraints (drought, flood, poor soil, climate‑related shocks)

5. Policies to alleviate poverty & redistribute income

• Economic‑growth strategies – investment in transport & energy infrastructure; attracting foreign direct investment; export‑oriented industrial policies.
• Education and skills development – free primary & secondary schooling; vocational training; adult literacy programmes (e.g., South Korea’s 1960s universal primary education).
• Health‑care provision – universal health coverage, vaccination campaigns, maternal‑child health services.
• Welfare and social safety nets – cash‑transfer programmes, unemployment benefits, non‑contributory pensions (e.g., Brazil’s Bolsa Família).
• Progressive taxation – higher marginal tax rates on top income brackets, estate taxes, wealth taxes.
• National minimum wage (NMW) – legally set floor to protect low‑paid workers.

6. Why living standards differ between countries (Cambridge syllabus 5.1 & 5.3)

The syllabus lists eight main drivers; each is explained in one sentence and linked to per‑capita output.

1. Resource endowment – Abundant natural resources can raise national income, but without good governance the “resource curse” can depress productivity and distribution.
2. Human capital – Better education and health increase labour productivity; they are captured in the technology factor A of the production function Y = A·K^αL^1‑α.
3. Physical capital – More machinery, infrastructure and equipment raise the capital‑per‑worker ratio, boosting output per worker.
4. Technology & innovation – Diffusion of new ideas and processes raises A, allowing higher output for the same factor inputs.
5. Institutions & governance – Secure property rights, rule of law, low corruption and efficient bureaucracy encourage investment and market efficiency.
6. Geography & climate – Access to sea routes, disease burden and agricultural potential affect production costs and trade opportunities.
7. Trade openness – Access to larger markets, cheaper inputs and export opportunities can accelerate growth.
8. Macroeconomic stability – Low inflation, sustainable fiscal balances and stable exchange rates create a predictable environment for investment.

Cross‑cutting factor: Population size and structure influence per‑capita output; a large, healthy working‑age population can amplify the effect of the above drivers (demographic dividend).

7. Why living standards differ within countries (Cambridge syllabus 5.1 & 5.2)

1. Education and skill gaps – Regions with better schools and training produce higher‑paid workers.
2. Urban‑rural divide – Cities concentrate services, higher‑value jobs and infrastructure; rural areas rely on low‑productivity agriculture.
3. Labour‑market institutions – Minimum‑wage laws, collective‑bargaining coverage and employment‑protection regulations vary across regions.
4. Access to capital – Entrepreneurs in wealthier areas find finance more easily, leading to more productive firms.
5. Discrimination – Gender, ethnicity, caste or religious bias can restrict access to education, jobs and credit.
6. Regional policy differences – Devolved fiscal powers may result in unequal provision of health, transport and education.
7. Historical legacies – Colonial borders, land‑ownership patterns or past conflicts shape present‑day inequality.

8. Inter‑relationships: poverty, inequality and development

• High inequality can hinder growth by limiting human‑capital development, reducing social cohesion and discouraging investment.
• Poverty‑reduction policies (education, health, cash transfers) often raise productivity, creating a virtuous cycle of higher living standards.
• Rapid economic growth without inclusive policies may raise average income while leaving the poorest behind, widening the inequality gap.

9. Population – factors affecting growth & effects on living standards (Cambridge syllabus 5.3)

Factors influencing population change

• Birth rate – shaped by fertility preferences, access to contraception, women’s education.
• Death rate – affected by health‑care quality, nutrition, disease prevalence.
• Net migration – driven by economic opportunities, political stability and environmental conditions.

Effects of population size and structure on living standards

• Labour supply – A growing working‑age population can boost output (demographic dividend) if adequate jobs exist.
• Dependency ratios – High numbers of children or elderly increase pressure on education, health and pension systems.
• Urbanisation – Concentrates labour and markets, often raising productivity, but can create slums and strain services.
• Resource pressure – Larger populations raise demand for food, water and energy, potentially lowering per‑capita living standards if supply does not keep pace.

10. Comparative case study (illustrative)

11. Discussion questions (exam‑style)

• How can a resource‑rich country avoid the “resource curse” and achieve a high standard of living?
• Why might two countries with similar GDP per capita have very different Gini coefficients? Illustrate with examples.
• 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? Suggest complementary measures.
• Explain how a demographic dividend can be turned into higher living standards, and why it may fail.

12. Suggested diagram

13. Summary

Differences in living standards between countries arise from a mix of resource endowment, human and physical capital, technology, institutions, geography, trade openness and macro‑economic stability. Within countries, disparities stem from education gaps, urban‑rural divides, labour‑market institutions, access to capital, discrimination and regional policy differences. Accurate assessment requires a suite of indicators – real GDP per capita, GNI per capita, HDI, MPI and environmental‑sustainability measures for standards of living, and Gini, quintile‑share or Palma ratios for distribution. Poverty is defined both absolutely (US $2.15 a day, 2022) and relatively (below 60 % of median income). Its causes include unemployment, low wages, health problems, age‑related vulnerability and environmental constraints. Inclusive policies – investment in education and health, welfare safety nets, progressive taxation and a national minimum wage – help reduce poverty and inequality, while population dynamics act as a cross‑cutting factor influencing both the level and distribution of living standards.