Cambridge IGCSE Economics 0455 – Economic Development: Living Standards
Economic Development – Living Standards
Objective
To evaluate the advantages and disadvantages of real GDP per head and the Human Development Index (HDI) as indicators of economic development and living standards.
1. Real GDP per Head
Real GDP per head (also called real GDP per capita) measures the average value of goods and services produced per person, adjusted for inflation.
Formula:
\$\text{Real GDP per head} = \frac{\text{Real GDP}}{\text{Population}}\$
Advantages
Provides a single, easy‑to‑understand figure for comparing the economic size of different countries.
Adjusts for inflation, allowing comparison over time without price‑level distortions.
Data are widely available from national accounts and international organisations.
Useful for assessing the capacity of an economy to generate income for its residents.
Disadvantages
Ignores the distribution of income – a high average can mask large inequalities.
Does not capture non‑market activities (e.g., household work, informal sector).
Excludes environmental degradation and resource depletion.
Fails to reflect quality of life factors such as health, education, and freedom.
2. Human Development Index (HDI)
The HDI combines three dimensions of human development: health, education, and standard of living.
where each component index \$I\$ is normalised between 0 and 1.
Advantages
Broadens the view of development beyond pure economic output.
Incorporates key social indicators that directly affect well‑being.
Allows comparison of progress in health and education alongside income.
Highlights gaps between income growth and improvements in human welfare.
Disadvantages
Relies on a limited set of indicators; important aspects such as inequality, gender disparity, and environmental sustainability are omitted.
Component weights are equal, which may not reflect the relative importance of each dimension for every country.
Data quality and availability can vary, especially for education and health statistics.
Aggregating diverse dimensions into a single number can oversimplify complex development issues.
3. Comparative Summary
Indicator
Key Strengths
Key Weaknesses
Real GDP per Head
Simple monetary measure
Widely available data
Inflation‑adjusted
Ignores income distribution
Excludes non‑market activities
No social or environmental dimension
Human Development Index (HDI)
Integrates health, education, income
Reflects broader well‑being
Highlights gaps between income and human outcomes
Limited to three dimensions
Equal weighting may be inappropriate
Data gaps and quality issues
Suggested diagram: A two‑axis chart comparing Real GDP per Head (vertical axis) with HDI (horizontal axis) for a selection of countries, illustrating how high income does not always translate into high human development.
4. Conclusion
Both real GDP per head and the HDI provide valuable but incomplete pictures of economic development. Real GDP per head is essential for assessing the productive capacity and income generation of an economy, while the HDI adds depth by measuring health, education, and living standards. Effective policy analysis should consider both indicators, supplemented by additional measures of inequality, environmental sustainability, and quality of life.