What Is the Concept of Standard of Living?

What Is the Concept of Standard of Living?

By: Eric Johnson

In our daily lives, we all make purchase decisions. Some items are necessities that we all need to sustain our daily lives. Necessities include food, utilities, housing, transportation, medicine, and health care services. Each of those examples is something we are unlikely to give up—even if our incomes change. If we face a tradeoff, we may reduce our consumption of each item or substitute a good for an inexpensive one. However, all of us are likely to purchase groceries, pay our electric and water bills, and make our monthly rent or mortgage payments.

Other items are what economists may consider luxury goods. Luxury goods are items we all enjoy having but are not necessary to sustain our daily lives. Luxury goods include jewelry, expensive sports cars, liquor, and high-end televisions. While we may try to justify each of these items in our consumption patterns, it is more likely than not that we do not need these items to live a fulfilling life. Most of us prefer a sports car for our transportation needs; however, a lower-priced and reliable mid-size car fits our budget constraints more neatly than an expensive automobile.

You may be wondering how necessities and luxury goods relate to standard of living. Our standard of living determines the types of goods we can purchase. Economists define the standard of living as the quantity and quality of goods and services available to a population. As an economy grows and expands, consumers’ incomes generally rise, and they can purchase higher-quality goods and services. In addition, consumers generally prefer to increase their purchases of luxury goods as their standard of living grows. When an economy slows and contracts, consumers’ incomes stagnate or fall and tend to decrease consumption. Thus, a person’s standard of living can quickly depend on the state of the economy when they do not have a sound financial plan.

Our quality of life and perceptions of wealth largely depend on our standard of living. Some external factors impact our standard of living. Factors that may enhance or impede our standard of living include geography, public services, inflation, pollution, and population density. These external factors may affect our quality of life and, in turn, may help or hurt our ability to generate wealth. For some of us, increasing our standard of living means higher quality cars, a lovely suburban house, and the ability to travel. For others, an increase in our standard of living means a large retirement nest egg. Whatever your desires are, it is essential to remember that our standard of living will dictate our consumption and saving patterns.

Sound financial planning allows you to minimize expenses, increase savings, and prepare for future goals. Therefore, when developing and following a sound financial plan, you also contribute to your living standard. While your standard of living may have constraints due to external factors beyond your control, you can build a plan that withstands those forces to build wealth. As your wealth increases, so will your standard of living. Creating a sound financial plan increases your standard of living while also preparing you for tomorrow’s emergencies. Hopefully, this topic motivates you to take control of your financial decisions to better your future self. Trust me—your future self will thank you again and again.

Mr. Johnson is the Director of Financial Aid and an adjunct faculty member at Goldey-Beacom College.