Indicators of living standards: Human Development Index (HDI) and its components

Economic Development – Living Standards (Cambridge IGCSE 0455)

1. What is meant by “living standards”?

• Living standards describe how well people in a country or region can meet their basic needs and enjoy a decent quality of life.
• In the syllabus the focus is on quantitative indicators that allow:

  • comparison within a country (over time or between regions), and
  • comparison between countries.

2. Main indicators used in the syllabus

3. Real GDP per head

3.1 Definition & formula

Real GDP per head = Real Gross Domestic Product (base‑year prices) ÷ mid‑year population.

Growth rate (percentage change):

\$\text{Growth %} = \frac{\text{GDP pc}{t} - \text{GDP pc}{t-1}}{\text{GDP pc}_{t-1}} \times 100\$

3.2 Strengths

• Directly measures the average amount of goods and services produced per person.
• Useful for tracking economic growth over time.
• Data are available for almost every country.

3.3 Weaknesses

• Ignores how income is distributed – a high average can mask widespread poverty.
• Excludes non‑market activities (household work, volunteer work).
• Does not capture health, education, environmental quality or personal well‑being.

3.4 Evaluation (AO3)

When the syllabus asks you to evaluate which indicator is more appropriate, consider the purpose of the analysis:

• If you need to assess the capacity of an economy to produce goods and services, Real GDP per head (and its growth rate) is the most relevant.
• If you are asked to discuss people’s well‑being or policy effectiveness in health and education, the HDI (or IHDI) provides a broader picture.
• For a complete assessment you should combine both – e.g., a country with high GDP pc but a low HDI indicates that growth is not translating into improved living standards.

4. Human Development Index (HDI)

4.1 Definition

The HDI is a dimensionless index ranging from 0 (lowest human development) to 1 (highest). It is the geometric mean of three normalised sub‑indices:

\$\text{HDI}= \bigl(I{\text{health}} \times I{\text{education}} \times I_{\text{income}}\bigr)^{\frac13}\$

4.2 The three sub‑indices

4.3 Why these reference values?

• Health: 20 years is roughly the lowest life expectancy ever recorded; 85 years is close to the highest observed value.
• Education: 15 years approximates the total possible years of formal schooling (primary + secondary + higher). 18 years reflects the maximum reasonable expectation for a child’s schooling.
• Income: The logarithmic transformation captures the diminishing marginal utility of income. \$100 is a practical lower bound for GNI pc; \$75 000 represents the highest observed value.

4.4 Worked example – calculating HDI (single year)

Country X (2023 data):

• Life expectancy (LE) = 72 years
• Mean years of schooling (MYS) = 9 years
• Expected years of schooling (EYS) = 12 years
• GNI per capita (PPP) = $15 000

Step 1 – Health index

\$I_{\text{health}}=\frac{72-20}{85-20}= \frac{52}{65}=0.80\$

Step 2 – Education index

\$I_{\text{education}}=\frac12\left(\frac{9}{15}+\frac{12}{18}\right)=\frac12\left(0.60+0.67\right)=0.635\$

Step 3 – Income index

\$\$I_{\text{income}}=\frac{\ln(15\,000)-\ln(100)}{\ln(75\,000)-\ln(100)}

=\frac{9.62-4.61}{11.23-4.61}=0.757\$\$

Step 4 – HDI (geometric mean)

\$\text{HDI}= (0.80 \times 0.635 \times 0.757)^{1/3}= (0.384)^{1/3}=0.73\$

Interpretation: 0.73 → high human development (UNDP classification).

4.5 Interpreting HDI trends over time (AO2 practice)

Suppose Country Y’s HDI rose from 0.58 (2010) to 0.68 (2020). Possible reasons for the improvement:

• Increase in life expectancy due to better health services.
• Expansion of compulsory secondary education → higher MYS and EYS.
• Economic growth raising GNI pc, but the logarithmic formula means large gains are needed for a big impact on the income index.

When analysing trends, always link the change to the underlying component(s) that are most likely to have moved.

4.6 UNDP classification of HDI scores

• Very high human development: HDI ≥ 0.800
• High human development:  0.700 ≤ HDI < 0.800
• Medium human development: 0.550 ≤ HDI < 0.700
• Low human development:  HDI < 0.550

4.7 Advantages and disadvantages (AO3 evaluation)

4.8 Linking to the syllabus requirement on sustainability

Although the HDI itself does not contain an environmental or sustainability component, the syllabus expects you to recognise this gap. Mention that the UNDP now publishes the Human Development Index – Sustainable Development (HDI‑SD) and the Inequality‑adjusted HDI (IHDI)**, both of which attempt to incorporate additional dimensions such as ecological footprint or inequality.

5. Income distribution – Gini coefficient

5.1 Definition & calculation

• Ranges from 0 (perfect equality) to 100 (perfect inequality).
• Derived from the Lorenz curve, which plots cumulative % of population against cumulative % of income.
• Gini = (Area between line of equality and Lorenz curve) ÷ (Total area under line of equality) × 100.

5.2 Interpretation

• Low Gini (≤ 30) → relatively equal distribution.
• Medium Gini (30‑45) → moderate inequality.
• High Gini (≥ 45) → high inequality; many people may be poor even if GDP pc is high.

5.3 Connection to the HDI

The UNDP’s Inequality‑adjusted HDI (IHDI) reduces each sub‑index by the inequality penalty. A country with a high HDI but a high Gini will have a noticeably lower IHDI, highlighting the importance of distribution when assessing living standards.

6. Poverty

6.1 Key definitions (AO1)

• Absolute poverty – living on less than a fixed monetary threshold (e.g., $1.90 a day). The threshold does not change with the overall level of income in a country.
• Relative poverty – living with an income (or consumption) significantly below the average in a society, usually defined as less than 60 % of median household income. It reflects social exclusion rather than a basic survival line.

6.2 Measuring poverty (AO2)

• Percentage of population below the poverty line.
• Number of people in poverty = (poverty rate ÷ 100) × total population.
• Depth of poverty (poverty gap) – average shortfall of the poor from the poverty line.

6.3 Main causes (AO1)

• High unemployment or under‑employment.
• Low wages and insecure contracts.
• Limited access to quality education and health services.
• Rapid population growth outpacing job creation.
• Geographical isolation or conflict.

6.4 Policies to alleviate poverty (AO3 evaluation)

7. Population and living standards

7.1 Core demographic measures (AO1)

• Crude birth rate (CBR) = (Number of live births ÷ mid‑year population) × 1 000.
• Crude death rate (CDR) = (Number of deaths ÷ mid‑year population) × 1 000.
• Natural increase rate = CBR – CDR (expressed per 1 000).
• Net migration rate = (Immigrants – Emigrants) ÷ mid‑year population × 1 000.
• Population growth rate = Natural increase + Net migration (per 1 000).

7.2 Optimum population concept (AO2)

The “optimum” population is the size at which a country can provide a satisfactory standard of living to all its citizens. It depends on:

• Resource base (land, water, energy).
• Level of technology and productivity.
• Institutional capacity to deliver health, education and social services.

In practice the optimum is a theoretical benchmark; most countries aim to keep growth at a level that does not outstrip their capacity to improve living standards.

7.3 Effects of population size and age structure on living standards (AO3)

7.4 Example calculation (AO2)

Country Z (2022):

• Mid‑year population = 12 million
• Live births = 144 000
• Deaths = 84 000
• Immigrants = 30 000; Emigrants = 10 000

CBR = (144 000 ÷ 12 000 000) × 1 000 = 12 per 1 000

CDR = (84 000 ÷ 12 000 000) × 1 000 = 7 per 1 000

Natural increase = 12 – 7 = 5 per 1 000

Net migration = (30 000 – 10 000) ÷ 12 000 000 × 1 000 = 1.7 per 1 000

Population growth rate ≈ 5 + 1.7 = 6.7 per 1 000 (≈ 0.67 %).

8. Comparing the main living‑standard indicators (AO3)

9. Quick revision checklist

• Define real GDP per head, growth rate, HDI, IHDI, Gini coefficient.
• Write down the three HDI sub‑index formulas and the reference minima/maxima.
• Explain why a geometric mean is used for the HDI.
• Calculate an HDI from a set of data (practice both single‑year and trend questions).
• State the UNDP classification of HDI scores.
• List at least two advantages and two disadvantages of the HDI (and of real GDP pc).
• Describe one strength and one limitation of real GDP pc.
• Define absolute and relative poverty, give one cause and one policy response for each.
• Explain the role of the Gini coefficient and how it links to the IHDI.
• Calculate CBR, CDR, natural increase and net migration rates from given data.
• Discuss how population size and age structure can affect living standards and HDI.
• Evaluate which indicator (GDP pc, HDI, IHDI) is most appropriate for a given policy question.

10. Link box – connections to other IGCSE topics