**Empirical Project 4** Measuring wellbeing

## Learning objectives

In this project you will:

- check datasets for missing data (Part 4.1)
- sort data and assign ranks based on values (Parts 4.1 and 4.2)
- distinguish between time series and cross sectional data, and plot appropriate charts for each type of data (Parts 4.1 and 4.2)
- calculate the geometric mean and explain how it differs from the arithmetic mean (Part 4.2)
- construct indices using the geometric mean, and use index values to rank observations (Part 4.2)
- explain the difference between two measures of wellbeing (GDP per capita and the Human Development Index) (Part 4.2).

## Key concepts

Concepts needed for this project: mean.Concepts introduced in this project: index, time series data, cross-sectional data, geometric mean, and the natural log transformation.

## Introduction

## CORE projects

This empirical project is related to material in:

GDP per capita is a widely used summary measure of incomes in a country. It is calculated by dividing gross domestic product (GDP)—the total value of all the goods and services produced in a country in a given period, such as a year—by the population of the country. GDP per capita is therefore a measure of average annual income in a country.

To read more about GDP per capita, see Section 1.3 of *Economy, Society, and Public Policy*.

GDP per capita is commonly used in economics to compare living standards across countries or measure progress in living standards over time. The rationale is that higher income and expenditure means a greater ability to spend on goods and services, which in turn increases material wellbeing. Since material wellbeing can contribute to non-material wellbeing, we might also expect countries with higher GDP per capita to have higher non-material wellbeing. But how do we measure non-material wellbeing? And does a higher GDP per capita necessarily mean a higher non-material wellbeing?

- index
- An index is formed by aggregating the values of multiple items into a single value, and is used as a summary measure of an item of interest. Example: The HDI is a summary measure of wellbeing, and is calculated by aggregating the values for life expectancy, expected years of schooling, mean years of schooling, and gross national income per capita.

To answer these questions, we will first learn how different variables can be summarized in an **index** by looking at GDP and its components. Indices are often used to summarize a number of different variables, all describing a common object or phenomenon, into a single number that can give an overall picture of what is happening. You may be familiar with the consumer price index (CPI), a common measure of inflation.

We will then learn how indices of non-material wellbeing are constructed, and compare an index of material wellbeing (GDP per capita) with an index of non-material wellbeing (the Human Development Index).