Per Capita Income: Uses And Limitations

Per capita income measures the amount of money earned by every person in a particular country, state, or city. It determines the average income of a person in that specific region. It indicates the standard of living and the quality of life of people in the geographical location under consideration. The per capita income of a country is calculated by dividing its national income by its population, including men, women, and children. Per capita income helps study statistics, economics, and many other fields.

Importance of Per Capita:

Per capita is the measurement of income per person in a defined region, state, or country. It is calculated by dividing the total earned income by the population. It is not the same as the average income of a person because the population includes non-earning members like children etc. It indicates the living standards and quality of life of those residing in that region or country. It is used to compare the economic conditions of different countries. The two most popular parameters in economics related to per capita are as follows:

Gross domestic product (GDP) per capita: GDP per capita is a measurement of a country’s average economic output by the people living in the country. The GDP per capita of a country is determined by dividing the country’s total domestic output by its population. 

The formula for GDP is GDP per capita = Gross domestic product/population. 

Gross National Income Per Capita: The gross national income per capita is calculated using the same information as used in the calculation of GDP, in addition to any income that results from the income of residents living abroad. 

The Gross Domestic Product per capita in India, after being adjusted by purchasing power parity (PPP) showed an increasing trend (except in 2020) and was last recorded at 6675.35 US dollars in 2021.

Uses of per Capita Income:

• Per capita income is a crucial tool in economics and statistical studies and a useful indicator of the living standards of people, which also influences business strategies and decisions. Some of the uses of per capita income are given as follows:  
• Per capita income measures the amount of money earned per person in a nation or geographic region. 
• Per capita income indicates the average income per person in a region, which helps to evaluate the standard of living of the population living in the region.
• Per capita is a general parameter to ascertain the possession of wealth or lack of wealth by the population in a region.
• Per capita income is useful in evaluating people’s affordability and purchasing power.
• Per capita income indicates whether certain commodities and facilities are out of reach by average people in terms of financial aspects.
• Businesses use per capita income information for deciding the marketing and sales strategies for potential customers depending on their income structure.
• Businesses and industries analyze the market demand for their products based on the per capita income of that region to increase sales and revenue. 
• Prominent business chains and owners consider the per capita income as the chances of profitable revenue reduced with lower per capita income.
• The per capita income is a useful indicator to compare the economic situation of countries.

The Calculation of per Capita Income:

Per capita income is a measurement of the population’s average income per –person and is often used to compare countries’ economic situations with different population sizes. The interpretation of per capita income is essential in determining the standard of livelihood of the population, which is a crucial indicator of a country’s economic development.

Per capita income is calculated by using the following formula:

Per capita income = Total income of the population/population. 

For example, if the total population of a geographical area is 5,000 people, and the total income earned by the population is Rs. 10, 00,000 then the per capita income of that region will be: 

10,00,000 / 5,000 = Rs. 200

Limitations of Per Capita Income:

Per capita income is a reliable and widely used economic metric, but just like any other economic indicator, it also comes with a few limitations. Some of these limitations are as follows:

• Inflation: The per capita income of a country doesn’t consider inflation or the rate of price rise in the economic scenario. Inflation adversely impacts the purchasing power of consumers and limits increase in income. The per capita income, therefore, overstates the average income of a place’s population.
• Children: Calculation of per capita income includes children and even newborn babies, who don’t contribute to the income earning of the country. The countries with more children will generate distorted per capita income results as they would have more people dividing up the income versus countries with fewer children.
• International comparisons: Making international comparisons of living standards using per capita income can be unfair and inaccurate because the currency exchange rates between countries are not considered when calculating per capita income. 
• Savings: Per capita income calculations do not consider the savings of individuals. An individual may have a low annual but can possess a lot of wealth and savings used to maintain a high quality of livelihood. The per capita calculation is based on the income level so it will consider the wealthy person as a very low-income earner and decrease the overall per capita income.
  
• Living standards: The inequality in the income of people from different parts of society and work backgrounds is not reflected by per capita income. So it may not always provide an accurate representation of a particular area or country’s standard of living or prosperity. The huge difference between income levels between different parts of the community may produce a skewed result in the per capita value that doesn’t indicate the proper economic scenario. This may also affect the availability of administrative support and public assistance.
  
• Economic Welfare: The welfare of the people in a region is not captured in per capita income. The measurement is used to determine the living standards of people. Still, it doesn’t consider the quality of work conditions, working hours, education facilities, and health benefits available to the general population. As a result, the per capita income may not truly indicate the community’s overall welfare. 

Important Data on Per Capita Income:

• India’s Gross Domestic Product (GDP) per capita was 2,321.104 USD in Mar 2022, compared to 1,968.163 USD in Mar 2021.
• India’s per capita net national income (NNI) at current prices during 2020-21 is estimated at 128,829 INR compared to 134,186 INR for the year 2019-20. 
• India is in 144th position out of 194 economies in terms of GDP (nominal) per capita. 
• India is in the 33rd position in per capita income among Asian countries.

Conclusion:

Per capita income is an important parameter to analyze the population’s purchasing power, affordability, and living standards and determine a nation’s economic trends. However, it is essential to note that per capita income is not the only metric to judge the average earnings of people and the socio-economic scenario. It should be used with other income parameters such as savings, wealth, poverty, inflation, welfare opportunities, and income disparities.