Measuring Standards of Living

Measuring standards of living is the process of assessing the level of economic welfare and consumer satisfaction, strictly in terms of economic well-being, of a given economic context. The standard of living determines a household's or a consumer's ability to purchase goods and services from which utility is then derived in a certain time or place. The term refers specifically to the economic component of utility, hence excluding any other impact the good has on well-being. For instance, the availability of sun impacts the standard of living to the extent that good weather is consumed (e.g., with more leisure activity), but it does not include the impact of sun on other aspects of the utility function (e.g., the psychological or health benefit deriving from it, or the pleasure deriving from leisure). Due to its purely economic nature, standards of living indicate the economic welfare of an economy or an individual and can be used as an indicator of poverty.

A broader measure of welfare that includes more general benefits on consumer utility is the concept of quality of life. While living standards encompass purely material consumption in terms of the goods purchased and consumed, quality of life also includes intangible aspects of welfare that are not closely related to economics (and are difficult to quantify economically). These include, for instance, the physical, social, and emotional components of living. Consequently, the concept of quality of life corresponds to a broader definition of well-being, which includes happiness, health, freedom, and all other noneconomic components of life that contribute to personal wealth. Due to the different perspective given to well-being by the concept of standards of living and quality of life, it would be possible and conceivable to have a high standard of living (high level of economic welfare) although having a low quality of life.

The concept of standards of living is a key concept in welfare economics: it provides an indication of the level of the economic well-being of an individual or a group of individuals living in a country. This indicator can then be used to compare different groups of people, living in the same location (e.g., changes of welfare over time), or across different countries. In other words, a measure of the standard of living allows the comparison in the level of economic well-being in different economic and social environments. Amartya Sen indicates three main perspectives in the analysis of the standards of living in the literature: utility, opulence, and freedom. While a utilitarian perspective interprets the standard of living in terms of material satisfaction derived from consumption, the opulent point of view focuses on the aspect of material possession deriving from a living standard (as from the perspective of a Consumer Price Index). Finally, the freedom approach focuses on the issue of being capable of accessing a living standard hence proposing the relativity of the concept of poverty and well-being to the context that it relates to.

Due to its importance in economics, the measurement of the standards of living is a necessary option. This type of assessment is crucial in understanding social equality and poverty, providing a quantitative element that allows monitoring the evolution in the living standards of different individuals over time and space. Specifically, a quantification of standard of living lends itself to the analysis of access to health care services (O'Donnell et al. 2008), material deprivation (Montgomery et al. 2000), and other aspects of poverty, such as social mobility.

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