Real GDP per head (also called real GDP per capita) is the average value of all final goods and services produced in a country in a given year, measured in constant (base‑year) prices and divided by the total population. It is the most widely used quantitative indicator of living standards.
The syllabus expects students to know at least the expenditure approach, but recognising the three methods shows full understanding.
Real GDP per head = \(\dfrac{\text{Real GDP (constant prices)}}{\text{Mid‑year population}}\)
\(GDP_{nominal}=C+I+G+(X-M)=\$1{,}200\text{ bn}\)
\[
GDP{real}= \frac{GDP{nominal}}{\text{Price Index}/100}
=\frac{1{,}200}{120/100}= \$1{,}000\text{ bn}
\]
\[
\text{Real GDP per head}= \frac{1{,}000\text{ bn}}{50\text{ million}}= \$20{,}000\text{ per person}
\]
Line graph: Real GDP per head (US$) over a 20‑year period for a single country, highlighting periods of rapid growth, stagnation and decline.
The HDI combines three basic dimensions of human development:
Each dimension is first expressed as an index between 0 and 1:
\[
\text{Life‑expectancy index}= \frac{\text{LE} - 20}{85 - 20}
\]
\[
\text{Education index}= \frac{\text{MYS}}{15} \;+\; \frac{\text{EYS}}{18}\;\Big/2
\]
\[
\text{Income index}= \frac{\ln(\text{GNI}_{PPP}) - \ln(100)}{\ln(75{,}000) - \ln(100)}
\]
Then the HDI is the geometric mean of the three indices:
\[
\text{HDI}= \big(\text{Life‑expectancy index}\times \text{Education index}\times \text{Income index}\big)^{1/3}
\]
Note: the income component uses a logarithmic transformation to reduce the impact of very high incomes (a key syllabus point).
| Component | Value | Index Calculation |
|---|---|---|
| Life expectancy | 78 years | \((78-20)/(85-20)=0.89\) |
| Mean years of schooling (MYS) | 9 years | \(9/15=0.60\) |
| Expected years of schooling (EYS) | 12 years | \(12/18=0.67\) |
| Education index | \((0.60+0.67)/2=0.635\) | |
| GNI per capita (PPP) | \$25 000 | \((\ln 25{,}000-\ln 100)/(\ln 75{,}000-\ln 100)=0.71\) |
| HDI | \((0.89\times0.635\times0.71)^{1/3}=0.74\) |
| Aspect | Real GDP per Head | Human Development Index (HDI) |
|---|---|---|
| What it measures | Average economic output per person (constant prices) | Health, education and standard of living (combined) |
| Strengths | Simple, widely available data; good for tracking economic growth | Broader view of wellbeing; less affected by short‑term price changes |
| Weaknesses | Ignores distribution, non‑market activity and quality of life | Data gaps; still an average; does not capture environmental or political factors |
| Typical syllabus use | Assess changes in living standards over time and between countries | Complement GDP to discuss overall development and highlight gaps between income and wellbeing |
The Gini coefficient measures the inequality of income (or consumption) distribution. It is derived from the Lorenz curve and ranges from 0 (perfect equality) to 1 (perfect inequality). It is often expressed as a percentage (0 % – 100 %).
Gini = \( \dfrac{A}{A+B}\) where A is the area between the line of perfect equality and the Lorenz curve, and B is the area below the Lorenz curve.
| Country | Real GDP per head (US$) | Gini coefficient | Interpretation |
|---|---|---|---|
| Country A | 30 000 | 0.30 (30 %) – low inequality | High average income and relatively even distribution. |
| Country B | 30 000 | 0.55 (55 %) – high inequality | Average looks good, but many people are still poor. |
Example: the international poverty line of US\$ 2.15 per day (2022 PPP). A family of four earning less than US\$ 2.15 × 365 × 4 ≈ US$ 3 140 per year is in absolute poverty.
Example: earning less than 60 % of median household income. If the median household income is US\$ 50 000, anyone earning below US\$ 30 000 is considered relatively poor.
The dependency ratio = (population < 15 + population > 64) ÷ (population 15‑64). A high ratio means fewer workers to support dependents, reducing output per worker and therefore real GDP per head.
| Country | Population (m) | Working‑age (15‑64) % | Dependency ratio | Real GDP per head (US$) |
|---|---|---|---|---|
| Country X (high‑income) | 50 | 65 % | 0.54 (54 %) | 100 000 |
| Country Y (low‑income) | 30 | 55 % | 0.82 (82 %) | 40 000 |
Draw a vertical bar chart with age groups on the vertical axis and population percentage on the horizontal axis.
The shape illustrates how age‑structure influences the dependency ratio and, consequently, GDP per head.
Real GDP per head = Real GDP ÷ Population. Faster growth in the denominator (population) can offset increases in the numerator (real GDP), leading to stagnant or falling living‑standard measures.
| Factor | How it influences living standards | Typical contrast: High‑income vs. Low‑income |
|---|---|---|
| Productivity (output per worker) | Higher productivity → more output with the same labour input. | Advanced technology & skilled labour in high‑income countries vs. low mechanisation in low‑income economies. |
| Sectoral composition | Manufacturing & services usually have higher productivity than agriculture. | 80 % employed in agriculture in many low‑income economies vs. < 10 % in high‑income. |
| Savings & investment | Higher investment raises the capital stock, boosting future output. | Investment > 20 % of GDP in high‑income nations; < 10 % in many developing economies. |
| Human capital (education & health) | Better‑educated, healthier workers are more productive. | Average schooling ≈ 12 years & life expectancy ≈ 80 years vs. ≈ 5 years & 65 years. |
| Natural resources | Abundant resources can raise income, but the “resource curse” may limit diversification. | Oil‑rich high‑income countries vs. resource‑poor agrarian economies. |
| Infrastructure | Good transport, electricity and communications reduce production costs. | Extensive road & broadband networks in high‑income vs. limited rural infrastructure in low‑income. |
| Political & institutional stability | Stable institutions attract investment and encourage efficient markets. | Transparent legal systems in high‑income vs. corruption and weak governance in many low‑income. |
Country A (High‑income) – GDP per head = US$ 100 000, HDI = 0.92
Country B (Low‑income) – GDP per head = US$ 4 000, HDI = 0.55
The contrast shows how each factor listed in the table translates into the observed differences in real GDP per head and HDI.
Real GDP per head is a fundamental, quantitative indicator of living standards, showing the average economic output available to each person. It is complemented by the Human Development Index, which adds health, education and a log‑scaled income component, and by the Gini coefficient, which highlights the distribution of that income. Understanding how poverty, population dynamics, and the wide range of economic, social and environmental factors interact enables students to explain why living standards differ between countries and to evaluate the impact of policy choices.
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