Measuring living standards

1. Real national income per head is the headline monetary indicator of living standards.
2. It must be real to strip out inflation and per capita to allow for population size, then converted at purchasing power parity to compare across countries.
3. Income alone misses health, education and distribution, so non-monetary and composite indicators are used alongside it.

Monetary indicators

1. GNI exceeds GDP where residents earn large net income abroad, such as remittances or profits on overseas assets.
2. NNI is the most complete measure because it nets off the capital equipment worn out in producing the output.
3. At the market rate a dollar buys more in a low-price economy, so PPP raises the measured income of many developing countries and makes the comparison fairer.

Issues of comparison

1. Market exchange rates swing with capital flows and can misvalue a currency, distorting cross-country comparisons, which is why PPP is preferred.
2. Non-marketed output and the informal economy are hard to value, and they are a larger share of activity in developing economies, so their income is understated.
3. An average conceals distribution: two countries with the same mean income can have very different poverty if one is far more unequal.
4. Data reliability differs between statistical agencies, and over time figures must be adjusted for both inflation and population change.

Non-monetary indicators

1. Health indicators include life expectancy at birth, infant mortality and doctors per thousand people.
2. Education indicators include the adult literacy rate and mean years of schooling.
3. Living-condition indicators include access to clean water, sanitation and daily calorie intake.

Composite indicators

1. The HDI ranks countries on a broader base than income, so a resource-rich state with poor schooling can rank below a poorer but better-educated one.
2. The MEW tries to correct GDP for wellbeing, but valuing leisure and pollution is subjective and rarely published officially.
3. The MPI is useful for targeting policy because it shows which deprivations, such as no clean water, are most common.

The Kuznets curve

1. Early industrialisation widens the gap as a modern, high-wage urban sector grows alongside a poorer traditional rural sector.
2. As development continues, wider education, social spending and progressive taxes redistribute income and narrow the gap.
3. The turning point is not automatic: some economies have grown much richer while inequality kept rising.

Which indicator gives the truest picture of development?

1. In favour of monetary indicators, real GNI per head at PPP is objective, widely available and comparable, and it correlates strongly with health and education, so income remains a reasonable first guide to development.
2. Against this, an average income hides distribution and the informal economy and ignores non-material welfare such as pollution and freedoms, so a high figure can mask deprivation; composite indices such as the HDI and MPI capture more, but they still rely on arbitrary weights and the standard HDI omits inequality and the environment.
3. The best choice also depends on the purpose: GNI per head at PPP for a broad ranking, the MPI for targeting poverty, and the HDI for a rounded comparison of living standards.
4. On balance, no single measure is sufficient, so a basket combining monetary, non-monetary and composite indicators gives the truest picture, with the weight on each depending on the question being asked.