Living Standards & Income Distribution (Cambridge (CIE) O Level Economics): Revision Note

Reasons for Differences in Living Standards and Income Distribution

• There are many reasons that cause differences in living standards and the income distribution within and between countries

1. Economic system: a mixed economy provides the highest quality of living standards. There is much debate on how much government planning there should be. However, countries in Scandinavia with a more mixed economic system score very highly on HDI and living standards. With completely free markets (unchecked capitalism), wealth inequalities increase exponentially. With planned economies, shortages abound 

2. The Government: the values of a government influence their economic agenda, tax system and government spending. Governments are more easily held accountable by the citizens in countries with a low level of corruption 

3. Corruption: significantly undermines quality of life and the standards of living 

4. Tax system: most countries have a progressive tax system for corporate and personal income tax. However, there can be many indirect taxes which completely change the quality of life for the poorest households 

5. Productivity levels: differences in skills result in difference in productivity and higher levels of productivity are rewarded with higher wages, which leads to a better standard of living 

6. Size of the population: more densely populated countries or cities face more challenges. A larger population can mean higher tax revenues but at the same time, government expenditure on services is spread across more people often resulting in less government spending/capita 

7. Education levels: These directly influence productivity and wages 

8. Inflation: Tends to impact poorer households more as any increase in general price levels represents a larger absolute value of their wages when compared to wealthier households 

9. Regional differences: Many countries have historically poor areas, as well as wealthier ones. Poverty in certain regions can be much higher 

10. Personal freedoms: religious, economic, personal, political and civil freedoms improve the quality of life within a nation