Edited by Edward N. Wolff
Chapter 6: Comparing Living Standards Across Nations: Real Incomes at the Top, the Bottom, and the Middle
Timothy M. Smeeding and Lee Rainwater* INTRODUCTION The types of yardsticks used by economists to measure living standards (or economic well-being across nations) are basically two. Macroeconomists use aggregate GDP per capita – a single value summary of economic output per person in a nation – to measure economic well-being. By converting currencies into comparable dollars (into real ‘purchasing-power adjusted’ terms) one creates a ‘one number per country’ measure of economic well-being. In contrast, microeconomists compare the distribution of disposable income across households to assess the distribution of economic well-being, expressed in terms of income per equivalent adult (or per equivalent child). Here the comparisons of well-being are almost always relative ‘within-nation’ comparisons of many points in the income distribution, including measures of central tendency such as the median or mean, but also the spread of incomes among people. These analyses lead to dissatisfying results from both perspectives. Real GDP per capita includes much more than is actually consumed by households, and by deﬁnition ignores the distribution of income among households (within countries). Distributions of income measure diﬀerences in sustainable consumption across the population within a country, but they are only relative and thereby ignore diﬀerences in ‘real’standards of living across countries. The usual exchange over these diﬀerences as they concern the United States runs something like this: the ﬁrst analyst suggests that ‘the United States is the richest nation on earth’, the second retorts that ‘income inequality is also highest in the United States’. The ﬁrst then...
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