Standard of Living

What is the Standard of Living?

The standard of living is a term used to describe the level of income, necessities, luxury, and other goods and services that are generally readily available to a designated population. It is basically a metric that evaluates the amount of material goods that are produced and sold within a specified geographic area – such as a community, province, state, or country.

Two of the most commonly used indicators of standard of living in a country are the gross domestic product (GDP) – the total production of goods and services within a calendar year – and GDP per capita. However, in its evaluation of the standard of living, the World Bank uses Gross National Income (GNI) per capita – the average per-person income that a country’s total population receives each year.

The concept of standard of living is closely related to, but considered distinct from, an evaluation of the quality of life in an area. The standard of living and quality of life are frequently evaluated using several factors considered common to both metrics.

The primary difference between the two metrics is that standard of living is a more readily quantifiable term, focused more on purely material factors, while the quality of life is typically a more subjective evaluation of how contented, satisfied, or fulfilled people feel with the nature of their lives.

Factors Used in Evaluating the Standard of Living

In addition to GDP or GDP per capita, the main factors that are usually used in any calculation of the standard of living are other readily quantifiable economic factors – such as average income, consumer spending, housing prices, the poverty rate in an area, available goods and services, the rate of inflation, and employment levels.

Other factors that may be included in examining the standard of living in an area are things such as access to medical care, educational opportunities, infrastructure, housing affordability, climate, crime rate, and the level of economic stability in the area. The relative health of the population – frequently measured using the metric of life expectancy – is also a factor considered when evaluating the standard of living.

The level of private business investment in an area can substantially improve the area’s standard of living – for example, if a major corporation such as FedEx opens a regional hub in a city that will provide numerous, well-paying jobs. Conversely, if a major retailer such as Walmart should close its store in a city, that would likely lower the standard of living due to the loss of jobs and access to goods.

Access to basic utilities is also a common consideration when measuring the standard of living. A region or country where few people with indoor plumbing or electricity experience a notably lower standard of living compared to an area where virtually all of the residents are able to access such basic necessities of life.

Factors such as environmental aspects, access to leisure and cultural activities, and political freedom may also be included in evaluating the standard of living, but such kinds of factors are more often looked at when evaluating the quality of life.

Criticism of GDP as a Standard of Living Metric

Although GDP is still the most commonly used economic metric for comparing the standard of living between countries, it is easy to point out the many ways in which GDP is a less than adequate measure. GDP fails to include key factors such as crime rate, environmental quality (e.g., pollution), and overall levels of health.

GDP also fails to factor in income disparity. Therefore, a country might be evaluated as having a very high standard of living when, in fact, only a relatively small proportion of the population lives well, while the bulk of the population lives in extreme poverty, not benefitting from the country’s high GDP rate.

Keep Learning

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Economic Indicators
• GDP Formula
• Macroeconomic Factor
• Happiness Economics
• See all economics resources