How Could We Measure Standard of Living?

[psikeyhackr]

Do you intend to take an average of whatever you use over an entire country. I say if you do that the result is a worthless statistical delusion. I think you should use 12 groups. Since we know the distribution of wealth and incomes are skewed don't use equal groups. I decided on a system derived from Sturgeon's Law.

90% of everything is crud.

Apply Sturgeon's Law 3 and you get 4 groups, 90%, 9%, 0.9% and 0.1% Now that 90% group is too big to give meaningful information so split it into 9 groups of 10%. So we need to know the average income and net worth in each of the 12 groups. The economists usually use quintiles, 5 groups of 20% each. Like there isn't a big difference between the top 1% and the 19th%. That group is so big and the wealth within it so concentrated that averaging it is meaningless.

If the purpose of knowing standard of living is to determine economic policies why not establish a policy of making sure everyone understands accounting? How everyone plays the economic power games year after year affects the future state of the standard of living regardless of how you measure it.

http://www.totse.com/en/politics/economic_documents/economicwargam179613.html

psik

 

[Roman]

Are you happy?

Yes
No


Then take the average.

 

[TruthSeeker]

Why do you zealots keep tossing "organic food" into every thread about economics? Don't you get it that the vast majority of the population doesn't give a rat's ass about it? It's expensive to produce and it doesn't store well. There's no way that it will ever be available to the general population at an affordable price, unless the world population is slashed by about 90 percent. If you insist on including your personal crusades in the standard of living, you're going to come up with a standard that nobody relates to and it will be a useless exercise.

Why eat vegetables that are full of pesticides? Nowdays, eating vegetables causes cancer. Isn't that bizarre?

Organic foods are only expensive because the demand for them is so low...
Doesn't store well? JIT.

How about if I insist that the standard of living means that every household must have two pedigreed dogs? Or tickets to a live rock and roll concert once a month? Those things are far more important to me than your stupid hippie health food! And I suspect if you took a poll of the human race, more people would want dogs and rock music than organic zucchini.

My standard of living includes home made pizza, doughnuts, and chocolate truffles.

You don't usually act like this.... :wtf:

 

[TruthSeeker]

I have an 800 page accounting book with lots of color glossy pictures but nowhere does it have a diagram like this. It doesn't mention the chart of accounts until page 72 and doesn't get to depreciation until 624. It claims to be a 1st year course. Accounting is so easy everything most people need to know could be covered in a semester.

http://www.bsu.edu/news/article/0,1370,-1019-11714,00.html

psik

Accounting is a very complex subject. While personal accounting is simple and most people are able to learn it, accounting in general is a very difficult subject to study, because it is a blend of mathematics and law. How many people you know are able to prepare a Cashflow Statement?

 

[Billy T]

....Organic foods are only expensive because the demand for them is so low...

I stopped reading here. It is so obvioulsy false. The farmers putting pesticides on crops do so, not to poison people, but because it reduces the cost of production.

 

[quadraphonics]

im not arguing against using net worth. i just don't understand how net worth can be used as a standard of living, which is an index that must be able to apply across countries.

if i understand you correctly, it seems that your logic implies that high-saving individuals should have a better quality of life since assets are much greater than liabilities (assuming depreciation on average affects us all the same). This seems wrong empirically. Asian countries and the Middle East have much higher national savings rates than do the US and the EU, but it is arguable whether the average consumer in these nations have "better" qualities of life. Typically, Asian workers work much longer hours and have less vacation than US workers, who in turn work longer and have less vacation than do European workers. Does that not say something about the "quality of life"?

I think the idea of emphasizing net worth over income is to differentiate between people that are rich and people that have large incomes. That is, consider two people. Person A makes $100,000 a year, but has no savings, and person B makes $10,000 a year but has $1,000,000 in savings. We'd probably agree that person B is better off, but if we go by income alone, we'd reach the opposite conclusion.

Note that the suggestion was to use household wealth, not the savings rate. The savings rate tells us what percentage of income gets saved, but that doesn't necessarily translate into higher household wealth. Indeed, people with very low total savings are likely to save at a higher rate, and vice versa. A semi-retired person (such as person B in the above) probably has a very low savings rate, but nevertheless has large savings. He doesn't need to save his income, because he's already rich.

 

[ubermich]

quad:

Note that the suggestion was to use household wealth, not the savings rate. The savings rate tells us what percentage of income gets saved, but that doesn't necessarily translate into higher household wealth. Indeed, people with very low total savings are likely to save at a higher rate, and vice versa. A semi-retired person (such as person B in the above) probably has a very low savings rate, but nevertheless has large savings. He doesn't need to save his income, because he's already rich.

your point is well-taken, but my argument still stands. you seem to be discussing the consumption and savings behavior of individuals over a lifetime, but the rates im referring to are the aggregate savings rates of a nation. i meant only that, as a whole, it seems that countries in the Middle East and East Asia save a larger proportion of their total incomes, meaning that their net assets are more likely to be positive, all else equal. but you bring up a good point that someone can have a low savings rate and still have a lot of wealth stored away somewhere, and while this is true in theory, it is uncertain whether this applies in the aggregate, especially across nations. while the average consumer in america probably has more equity capital and investments, the average consumer also consumes more as a percentage of his or her total income. so there may not be a link, theoretically, between savings and total wealth.

while the example may be bad, the argument still stands. if you take US and Europe, two areas of the world with low savings rates, you see that French and German workers average six to nine weeks more vacation than American workers of comparable skill and experience, receive more unemployment benefits for longer, enjoy more job security, and see higher wages thanks to the strength and coverage of the unionized labor sector in Europe. Obviously, these differences have more to do with socialist practices than t-accounts; total household wealth aside, you would be a fool not to acknowledge the influence of external factors on the quality of life in these respective places.

A better measure than t-accounts for a standard of living is purchasing power parity (ppp).

 

[quadraphonics]

your point is well-taken, but my argument still stands. you seem to be discussing the consumption and savings behavior of individuals over a lifetime, but the rates im referring to are the aggregate savings rates of a nation. i meant only that, as a whole, it seems that countries in the Middle East and East Asia save a larger proportion of their total incomes, meaning that their net assets are more likely to be positive, all else equal. but you bring up a good point that someone can have a low savings rate and still have a lot of wealth stored away somewhere, and while this is true in theory, it is uncertain whether this applies in the aggregate, especially across nations.

No, it's also the case that the per capita wealth (and per capita income) in the Middle East and East Asia are substantially lower than in the US (or Europe). So it is indeed a case of people with less wealth saving more, and people with more wealth saving less, at the national level.

while the average consumer in america probably has more equity capital and investments, the average consumer also consumes more as a percentage of his or her total income. so there may not be a link, theoretically, between savings and total wealth.

Exactly: the high savings in the Middle East and East Asia don't produce as high of returns, so the savings rate is not a reliable indicator of growth in household wealth. Moreover, the savings rate does not tell what percentage of income is being saved, but rather the growth in the savings. People who are working save part of their income, while retirees have no income and spend their savings. So the savings rate tells you more about the age demographics of a country than about the savings behavior of workers. It's not so much that workers in the Middle East and Asia save more of their income than Americans, but rather that they are younger countries overall (and so have more workers per retiree). Although, Japan is an exception to many of the generalizations I've made here.

total household wealth aside, you would be a fool not to acknowledge the influence of external factors on the quality of life in these respective places.

Quality of Life and Standard of Living are distinct concepts that are intended to measure different things. The problem with said external factors is that they are entirely subjective: they reflect different individual preferences about, for example, the relative values of free time vs. income. So, when you imply that the quality of life is higher in Europe than America, all you're really saying is that you have similar values to most Europeans, and that most Europeans would prefer to live in Europe than America. Quality of Life measures tell you more about the values of the people who come up with them than they do about the relative fullfilment of different populations. I.e., it does not follow that most Americans would prefer to live in Europe.

Another good candidate for comparing standard of living between countries is to look at migration between them. This gets complicated by differences in immigration laws, of course, but note that many more Europeans move to America each year than vice-versa.

A better measure than t-accounts for a standard of living is purchasing power parity (ppp).

Indeed, PPP is the standard unit for both per-capita GDP and household wealth when comparing between countries.

 

[Billy T]

...PPP is the standard unit for both per-capita GDP and household wealth when comparing between countries.

Where can one get this data? Is the PPP data just a measure of the "disposiable income" (after taxes, food minium, mortgage or rent etc) or is it that after being normalized by some "big Mac" index? For example, if a man in rural Kansas, can earn enough in 5 years to buy 1000 square foot row house as an investment and one in NYC can also, but his near NYC costs 4 times more do they have the same PPP?

 

[TruthSeeker]

I stopped reading here. It is so obvioulsy false. The farmers putting pesticides on crops do so, not to poison people, but because it reduces the cost of production.

There are other ways to preserve the plants...

 

[TruthSeeker]

I think the idea of emphasizing net worth over income is to differentiate between people that are rich and people that have large incomes. That is, consider two people. Person A makes $100,000 a year, but has no savings, and person B makes $10,000 a year but has $1,000,000 in savings. We'd probably agree that person B is better off, but if we go by income alone, we'd reach the opposite conclusion.

Note that the suggestion was to use household wealth, not the savings rate. The savings rate tells us what percentage of income gets saved, but that doesn't necessarily translate into higher household wealth. Indeed, people with very low total savings are likely to save at a higher rate, and vice versa. A semi-retired person (such as person B in the above) probably has a very low savings rate, but nevertheless has large savings. He doesn't need to save his income, because he's already rich.

I've actually created measures for those things....

I called it the "standard of living coefficient".

 

[quadraphonics]

Where can one get this data? Is the PPP data just a measure of the "disposiable income" (after taxes, food minium, mortgage or rent etc) or is it that after being normalized by some "big Mac" index? For example, if a man in rural Kansas, can earn enough in 5 years to buy 1000 square foot row house as an investment and one in NYC can also, but his near NYC costs 4 times more do they have the same PPP?

PPP numbers are quoted almost everywhere; the CIA world factbook, again. There's a single deflator for each country based on the average cost of a basket of goods and services. It's certainly the case that purchasing power varies within countries (especially countries as big as the United States), and so this gets averaged out in the calculation. It's also the case that a given individual doesn't spend his money in exactly the proportions suggested by the basket. PPP isn't really important for comparing countries with similar levels of development (i.e., EU and USA) as goods and services tend to have similar costs in said countries. The main reason is for looking at developing (or underdeveloped) countries, where it illustrates that, although per-capita income may be very low in exchange rate terms, it may still go pretty far in said country. Likewise, if a country pursues a monetary policy that keeps their currency low with respect to the dollar, you need to use PPP adjustments to cancel it out (i.e., China).

 

[ubermich]

quad

Moreover, the savings rate does not tell what percentage of income is being saved, but rather the growth in the savings.

that's wrong. the savings rate is simply the proportion of unspent income in a given period.

http://www.bankrate.com/brm/news/sav/20060308d1.asp

People who are working save part of their income, while retirees have no income and spend their savings. So the savings rate tells you more about the age demographics of a country than about the savings behavior of workers. It's not so much that workers in the Middle East and Asia save more of their income than Americans, but rather that they are younger countries overall (and so have more workers per retiree). Although, Japan is an exception to many of the generalizations I've made here.

i am familiar with the consumption smoothing patterns of people. people tend to dissave in early years, save during middle age, and again dissave as they approach retirement (like a negative cosin curve). i have acknowledged that the example is bad, but you take this argument too far. the lifetime consumption and savings behavior of individuals, while it follows this general pattern, does differ across countries. there are other factors that could alter the position and scale of this curve. for example, constraints in imperfect credit markets (as you see in India and other developing nations) alter consumption and savings patterns. i am also a firm believer that cultural biases affect savings and consumption rates across countries. while it's true that age demographics are a significant determinant of savings rates, there are other factors that affect it as well. NBER economist Kotlikoff actually argues that intergenerational transfer considerations are a larger determinant of savings than lifetime consumption and savings patterns (e.g. for retirement).

http://mitpress.mit.edu/catalog/item/default.asp?ttype=2&tid=9883

Quality of Life and Standard of Living are distinct concepts that are intended to measure different things. The problem with said external factors is that they are entirely subjective: they reflect different individual preferences about, for example, the relative values of free time vs. income. So, when you imply that the quality of life is higher in Europe than America, all you're really saying is that you have similar values to most Europeans, and that most Europeans would prefer to live in Europe than America. Quality of Life measures tell you more about the values of the people who come up with them than they do about the relative fullfilment of different populations. I.e., it does not follow that most Americans would prefer to live in Europe.

yes, quality of life is more subjective than standard of living. but, i think that you would be hardpressed to find anyone in the world who would choose to work six to eight weeks more per year at the same job for the same salary. some things are "subjective," but other things aren't. but fine, if you consider that too subjective, look at income inequality (an unambiguous standard of living indicator) between the us and europe. intergenerational and intragenerational income mobility are both significantly lower in the US, which again has nothing to do with the t-accounts of individuals.

Another good candidate for comparing standard of living between countries is to look at migration between them. This gets complicated by differences in immigration laws, of course, but note that many more Europeans move to America each year than vice-versa.

? this proxy measure would be subject to the same problem that you mentioned earlier: you cannot differentiate between a lower standard of living and a higher preference for the "quality of life" in europe. the determinants of migration are much more complicated than you seem to let on. in addition to migration laws, it's a function of labor demand and supply in both skilled and unskilled markets, relative wages, the degree of factor specialization between two countries, social networks in the home and destination area, potential remittance motivations, etc.

Billy T

Where can one get this data? Is the PPP data just a measure of the "disposiable income" (after taxes, food minium, mortgage or rent etc) or is it that after being normalized by some "big Mac" index? For example, if a man in rural Kansas, can earn enough in 5 years to buy 1000 square foot row house as an investment and one in NYC can also, but his near NYC costs 4 times more do they have the same PPP?

here's a commonl quoted proxy for the ppp:

http://www.oanda.com/products/bigmac/bigmac.shtml

 

[quadraphonics]

the savings rate is simply the proportion of unspent income in a given period.

Yeah, I misspoke. What I meant to get at was that the savings rate is calculated by taking the difference between GDP and consumption. However, because the consumption figure includes people with no income (i.e., retirees), the savings rate always under-estimates the proportion of income the workers are saving. This disparity gets more severe the older the population gets. The point is that a decrease in the savings rate doesn't imply a decrease in the savings rate of a given worker, and so doesn't imply a decline in standard of living. It just means that you have more retirees per capita (who presumably enjoy a higher quality of life, since they don't have to go to work). Of course, this only applies to developed countries. This can lead to problems if there's lots of dependence on pay-as-you-go social benefits, but that's a second-order effect.

i am familiar with the consumption smoothing patterns of people. people tend to dissave in early years, save during middle age, and again dissave as they approach retirement (like a negative cosin curve). i have acknowledged that the example is bad, but you take this argument too far. the lifetime consumption and savings behavior of individuals, while it follows this general pattern, does differ across countries. there are other factors that could alter the position and scale of this curve. for example, constraints in imperfect credit markets (as you see in India and other developing nations) alter consumption and savings patterns. i am also a firm believer that cultural biases affect savings and consumption rates across countries. while it's true that age demographics are a significant determinant of savings rates, there are other factors that affect it as well. NBER economist Kotlikoff actually argues that intergenerational transfer considerations are a larger determinant of savings than lifetime consumption and savings patterns (e.g. for retirement).

I'm not sure what your point is here... are you agreeing with me that savings rate is a poor measure of living standards?

but, i think that you would be hardpressed to find anyone in the world who would choose to work six to eight weeks more per year at the same job for the same salary.

Okay, but that's not the choice that people are offered. If Americans could get the same income with 2 months per year less work, they'd be migrating to Europe in droves. In fact, Europeans end up with lower incomes than Americans (per capita GDP is about 2/3 that of the USA, and there's higher taxes on top of that - and then there's the higher unemployment). If Americans wanted more vacation instead of more money, American companies would offer it to them.

but fine, if you consider that too subjective, look at income inequality (an unambiguous standard of living indicator) between the us and europe.

I don't see how that's unambiguous. Are you really saying that a country where everyone has an income of $10 is better off than a country where half the people make $100 and the other half make $1000? I'd only use this measure to discriminate between countries with very similar per-capita incomes.

this proxy measure would be subject to the same problem that you mentioned earlier: you cannot differentiate between a lower standard of living and a higher preference for the "quality of life" in europe. the determinants of migration are much more complicated than you seem to let on. in addition to migration laws, it's a function of labor demand and supply in both skilled and unskilled markets, relative wages, the degree of factor specialization between two countries, social networks in the home and destination area, potential remittance motivations, etc.

Yeah, there's lots of factors, but at the end of the day, no individual is going to migrate unless he or she believes it will raise their standard of living/quality of life.

The myriad problems with alternative measures emphasize why per-capita gdp (or wealth) is a good measure. Surely you'd agree that an increase in per-capita GDP in any country will, all other things being equal, translate into a higher standard of living and quality of life?

 

[Billy T]

... Billy T here's a commonl quoted proxy for the ppp:
http://www.oanda.com/products/bigmac/bigmac.shtml

Thanks for the link. I knew of this index (mentioned the need to correct by one in my post) BTW, do you know it was originally not a serious suggestion by the Economist author who first proposed the "Big Mac" index? - now it is considered one of the more useful!

I was pleased to see a big mac in US cost $3.10 and only $3.09 in Brazil (we make a lot of food stocks more cheaply here with cheaper land and labor, good weather and rain year round, etc. - Why it will be tough for US to compete as a supplier of food stocks to China, except in some crops (especially wheat). Thus by that measure of standard of living / well being etc, Brazil is slighly ahead of the US.

The conversion (March25 data) was R$2.0647 to the dollar. Five days later data, has seen the dollar drop more, to R$2.04 to the dollar, (about 1% in 5 days) so today a Big Mac in Brazil is only, $3.06, - I must go out around noon -perhaps I will buy one.

More on thread: The PPP fails to capture many things important to "quality of life." For example, on the plus side here in Brazil, the beaches are filled with trim girls and ladies in bathing suits whose total area of clothe is about equal to area of two dollar bills! On the negative side, if you linger too long looking at them and it gets dark, and you need to walk home a mile in Rio, then the chance you will be robbed is around 0.0001% Fortunately robberies are so common everyone understands the procedure and few people are injured* - Just give your watch (if not a <$10 timex - that would be insulting) and billfold. Then politely ask for your documments in the billfold to be given back. (A real pain, with days lost to get them re-issued)
----------------------
*Your only real danger of getting hurt, if you cooperate with the robber, is that a policman may happen buy. They are poorly trained, and trigger happy. A year or so ago, the police killed three people being robbed in Rio in one week. Then a funny catroon appeared in the local paper: A robbery is taking place on a street corner with the victum position so he can see down both streets (at 90 degree angle) but the robber can only see down the one he is standing on (He is not exactly at the corner). Victim is saying:
"For God's sake, please hurry - a policeman is coming!"

 

[Fraggle Rocker]

Why don't you make accounting mandatory in the schools and tell all of the kids they are supposed to concentrate on NET WORTH?

Net worth is a static metric. Standard of living is a dynamic one.

A person could maintain a good standard of living by using the ROI of a large net worth as gross income--or simply by dissipating the capital of a really large one. But people whose net worth is that large are a statistically insignificant portion of the population. Most Americans' net worth is less than six months' gross income and therefore has only a minor influence on their standard of living.

After all, our goal by definition is to accumulate sufficient net worth to retire by living off the sum of the income plus an actuarially sound conversion of the capital--plus our pathetic little pensions. The fact that so many of us are working beyond the traditional retirement age of 65 and even into our 70s indicates that we are failing to achieve that goal.

BTW: My degree is in accounting.

 

[(Q)]

BTW: My degree is in accounting.

Damn, you could have fooled me. The accountants I know are boring.

 

[Fraggle Rocker]

Damn, you could have fooled me. The accountants I know are boring.

I didn't say that I am a practicing accountant. I graduated in the mid-1960s when absolutely anybody with a degree in absolutely anything was recruited for computer programming. All we had to do was pass an aptitude test that looked a lot like the Mensa entrance exam. E.g., "What would this pile of blocks look like from behind?"

But it is a good education to prepare for any career, and for life in general. It teaches about cause and effect, cost and benefit, and the importance of recordkeeping in modern civilization. Not to mention: no matter who you are, unless you specialized in tax accounting (or live in poverty), never do your own taxes!

 

[TruthSeeker]

Net worth is a static metric. Standard of living is a dynamic one.

A person could maintain a good standard of living by using the ROI of a large net worth as gross income--or simply by dissipating the capital of a really large one. But people whose net worth is that large are a statistically insignificant portion of the population. Most Americans' net worth is less than six months' gross income and therefore has only a minor influence on their standard of living.

After all, our goal by definition is to accumulate sufficient net worth to retire by living off the sum of the income plus an actuarially sound conversion of the capital--plus our pathetic little pensions. The fact that so many of us are working beyond the traditional retirement age of 65 and even into our 70s indicates that we are failing to achieve that goal.

BTW: My degree is in accounting.

Yes, Fraggle. But what could you do so that everyone could enjoy a higher standard? You would need to accumulate quite a bit of capital to create a residual income, which would mean that other people wouldn't have enough, because there is not enough for everyone to do that.

:shrug:

 

[quadraphonics]

Most Americans' net worth is less than six months' gross income and therefore has only a minor influence on their standard of living.

Do you have a source for this statistic?