Health Equity and Financial Protection: Part I
This raises the question of how to measure living standards. One approach is to use “direct” measures, such as income, expenditure, or consumption. The alternative is to use an indirect or “proxy” measure, making the best use of available data.
Direct Approaches to Measuring Living Standards The most direct (and popular) measures of living standards are income and consumption. Income refers to the earnings from productive activities and current transfers. It comprises claims on goods and services by individuals or households. In other words, income permits people to obtain goods and services. Consumption, by contrast, refers to resources actually consumed. Although many components of consumption are measured by looking at expenditures, there are important differences between consumption and expenditure. First, expenditure excludes consumption that is not based on market transactions. Given the importance of home production in many developing countries, this can be an important distinction. Second, expenditure refers to the purchase of a particular good or service. However, the good or service may not be immediately consumed, or at least it may have lasting benefits. This is the case, for example, with consumer durables. Ideally, in this case, consumption should capture the benefits that come from the use of the good, rather than the value of the purchase itself. There is a long-standing and vigorous debate about which is the better measure of standards of living—consumption or income. For developing countries, a strong case can be made for preferring consumption over income, based on both conceptual and practical considerations. Measured income often diverges substantially from measured consumption, in part due to conceptual differences between them—it is possible to save from income and to finance consumption from borrowing. Income data are, moreover, often of poor quality, if available at all. If consumption data are used as a measure of living standards, it is customary to divide total household consumption (or income) by the number of household members (or the number of equivalent household members) to get a more accurate measure of the household’s standard of living. The per capita adjustment is quite common in empirical work in this area.
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