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N° 2007-03 |
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| January 2007 |
| International Comparisons of Living Standards
by Equivalent Incomes |
Marc Fleurbaey
Guillaume Gaulier |
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International comparisons of living standards are still primarily made using GDP per capita, in spite
of recurrent criticism that this is a partial and ill-founded measure of social welfare (Sen). Alternative
measures abound, such as the Index of Human Development computed by the United Nations Development
Program since 1990 or Osberg and Sharpe’s Index of Economic Well-being. The problem is that these
indicators are based on the aggregation of various subindexes of social performance, arbitrarily weighted.
We suggest reliance on a basic notion of welfare economics, namely, compensating variations, which take
into account country differences in non-income dimensions of living standards (such as leisure, health, etc)
and make international comparisons possible. We use compensating variations in a way that is consistent
with recent developments in social choice theory, so that our work is closely tied to a theoretically sound
notion of social welfare.
Specifically, we rely on compensating variations in the following way: When countries differ in some
non-income dimension, we set a reference level for this dimension and, for each country, compute the
willingness to pay (WTP) of the population in order to achieve this reference level. The current income
is then corrected with this amount; this gives an “equivalent income”, that is directly comparable between
countries. In short, all differences are converted to income differences so as to make comparison possible.
We consider inequalities in the distribution of income, in order to avoid counting a dollar for the poor as
equivalent to a dollar for the rich. We take into account the concept of (weak) environmental sustainability,
especially by evaluating the cost of the future exhaustion of mineral resources (using results byWeitzman).
Living standards are computed for a sample of twenty-four OECD countries. The results show that the
corrections make a noticeable difference: not surprisingly, the final index of living standard is correlated
with GDP per capita, but the general ranking of countries is substantially affected by the corrections. For
example, while Japan and France rank higher, the US move back. The configuration of the corrections
shows that several groups of countries with similar non-income features can be identified and associated
with different models of social and economic development. |
Non-technical summary |
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Résumé
non-technique
en français  |
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| Full text |
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| Living standards; social welfare; GDP; equivalent income; OECD |
Keywords |
| D60, D71, O57, P17 |
JEL classification |
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