Income Per Capita

Updated on January 29, 2024
Article byKosha Mehta
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Income Per Capita?

Income Per Capita by country refers to the average income calculated for each person in a certain country or population group. It is used to assess the level of living and the quality of life of individuals in a certain geographical area. It is important to note that this metric calculates all individuals, not just working citizens of a country.

Income per capita

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It is derived by dividing the aggregate income of a particular group by the total population in that group. The resulting income is rounded to the nearest whole dollar, which helps ascertain a country’s development status. Household income per capita is one of the three measures for calculating the Human Development Index of a nation. Per capita income is also called average income.

Key Takeaways

  • Per capita income is calculated by dividing a nation’s combined income by its total population.
  • It is used to gauge people’s living standards. However, it may not necessarily offer an accurate depiction of the level of life. In other words, it might be biased as it fails to account for income disparity.
  • It is calculated for an average per person and then expressed as a ratio. This ratio helps to determine different information depending on its context.
  • It is considered while determining the nation’s future strategy to raise living standards.

Income Per Capita Explained

The income per capita of a country is the per head income obtained by dividing the total national income of that country or state by the people of that geographical location. The term “income per capita” is derived from two Latin words: “Per Capita” means “by the head.” Per capita income is commonly used in various disciplines like statistics, business, and economics.

It is computed on a per-person basis and then given as a ratio. This ratio may be used to derive various information based on the situation. Every individual is considered while determining a country’s per head income. Hence, all people in the nation are included in the computation. This is primarily due to the measurement considering the entire country’s population versus a specific geographical place. Therefore, the per head income compares and evaluates the economic circumstances of nations with varied populations.

Economic growth is applied to economies that already have higher per-head incomes. Economic development is typically separated from economic growth, with the latter referring to economies near the subsistence level. This is related to whether per person income levels, and growth rates in industrialized economies would eventually coincide or drift.

It is worth considering whether the growth rates will decrease if the per person incomes of fast-growing economies such as Japan reach those of earlier-developed economies such as the United States. Economists who answer positively emphasize the parallels in altering demand patterns as per-person income grows.

Furthermore, highest income per capita in affluent societies are typically coupled with a shift in consumption toward services. As a result of the poor rise in productivity in the service sector, this theory goes, income inequalities and the rate of growth between nations should slowly shrink.

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Formula

The formula for calculating income per capita is fairly straightforward. It is calculated by dividing the total income of a country or region by its population. This calculation provides an average representation of the income earned by each individual in that area. Therefore, the formula is:

Income per capita = Total Income / Population

Here,

Total income refers to the Gross Domestic Product (GDP) of a country or region.

Population refers to the total number of people living in the country or region under consideration.

How To Calculate?

All countries want to have a high income per capital to bridge the gap between income groups. To calculate income per capita, we need two pieces of information: the total income of a country or region and the population of that country or region. Here’s the step-by-step process:

1. Determining the Total Income: Obtain the total income of the country or region you’re interested in. In most cases, this is represented by the Gross Domestic Product (GDP) of that area. GDP can be calculated using various methods, such as the production approach, expenditure approach, or income approach. For simplicity, let’s assume you have the GDP figure.

2. Finding the Population: Determine the population of the country or region. This is usually available from national statistics agencies, international organizations, or research institutions.

3. Using the Formula: Apply the formula for income per capita:

Income per capita = Total Income / Population

4. Calculation: Divide the total income by the population to get the income per capita. The resulting value represents the average income earned by each individual in that country or region.

Examples

Now that we understand the basics, formula, and how to calculate household income per capita, let us apply the theoretical knowledge into practical application through the examples below.

Example # 1

In an article by the Mint, East or Southeast Asian economies outperformed India during the same era. The article compares current income to independence-era income. It reveals India’s growth gaps. National income grew 1% yearly from 1900-01 to 1946-47, but income per capita in India rose 0.2% yearly. From 1950-51 to 2019-20, India regained economic freedom and pursued national development goals. As a result, the GDP has grown by a little over 29, doubling every 14 years, while the GDP per capita has doubled every 24 years.

Example #2

Every 10 years, the United States Census Bureau collects data on per capita income. Every September, it releases an updated estimate. The Census Bureau estimates per capita income by taking the previous year’s total revenue for everyone 15 and older. It then delivers the data’s median average. As per the data of the census bureau, as of 2020, the mean US income per capita was $53,996. Because there are quite a few extremely wealthy individuals in America, the mean is much higher. In 2019 as per the data, the mean income per capita was $54,129.

Example #3

An article by ‘Schroders’ describes the per capita income of China. Also, it compares how the size of  China is more than that of the U.S. Its population has already passed 1.4 billion, making it nearly four times the size of North America. This, however, is not the entire tale. China is far poorer than North America on average, with per capita national income less than a sixth of the size.

Benefits

Let us understand the benefits of an economy working towards improving their household income per capita through the explanation below.

1. International Comparisons: Income per capita is a common metric used to compare the economic well-being of different countries. It provides a quick and straightforward way to assess the relative prosperity of nations. Countries with higher income per capita generally have a higher standard of living, better infrastructure, and more developed economies.

2. Economic Growth Tracking: Over time, changes in income per capita can indicate the direction of a country’s economic growth. Increase in this metric is often associated with improving economic conditions, while declining income per capita can signal economic contraction or recession.

3. Policy Evaluation: Governments and policymakers can use it as a tool to evaluate the effectiveness of economic policies. Changes in income per capita may reflect the impact of policies related to taxation, investment, trade, and social welfare.

4. Resource Allocation: Income per capita can help allocate resources efficiently. Countries with higher income per capita often have more resources available for public services such as education, healthcare, and infrastructure development.

5. Development Indicators: It is commonly used in calculating and classifying countries’ development status. Organizations like the United Nations use income per capita along with other indicators to classify countries as developed, developing, or least developed.

Limitations

Although a high income per capita is strived for by most countries and is a widely used indicator, it has certain demerits. Let us understand its limitations through the points below.

  • As per capita income divides a population’s total income by the total number of people, it may not accurately depict the level of life. In addition, it might be biased as it fails to account for income disparity.
  • In an economy, per capita income does not represent a rise in prices; the pace at which prices grow over time. Therefore, inflation erodes consumer buying power and restricts any income growth. As a result, per it might exaggerate a population’s income.
  • When considering international comparisons, the cost of living disparities might be misleading since exchange rates aren’t factored in. Some critics of this concept argue that correcting for purchasing power parity is more realistic, as it helps to cancel out the difference in exchange rates across nations.
  • Individual savings and wealth are not included in per capita income. A rich individual, for example, may have a modest annual income from not working yet relying on savings to keep a high level of life. The affluent individual would be represented as a minimal earner using the per capita statistic.
  • Children are included in the overall population, although they do not make any money. Therefore, those with many children would have a distorted outcome since more individuals would distribute the money than in countries with fewer children.
  • Per capita income figures do not consider factors like quality of working circumstances, hours spent, education level, and medical benefits. As a result, the community’s general well-being may not be properly shown.

Frequently Asked Questions (FAQs)

What does income per capita mean?

The average money earned per person in a particular location in a given year is measured as per capita income or total income. It is computed by dividing the total revenue of the area by the entire population. Per capita income is calculated by dividing national income by population size.

What does gross national income per capita mean?

A country’s Gross National Income per capita is the entire sum of money made by its citizens and enterprises. It is used to calculate and track a country’s wealth through time. The figure covers the country’s gross domestic product and revenue from foreign sources. GNP is an alternative to GDP to measure and track a country’s wealth, and it is a more accurate measure for some countries.

What country has the highest income per capita?

Luxembourg retained the top place in GDP per capita rankings in 2021. It will continue at the top of the list for the near future since it is $28,908 ahead of the second-ranked occupant Ireland. Luxembourg outperforms second-ranked occupier Ireland in terms of per capita by a large margin of $15,209.

This is a guide to what is Income Per Capita. Here, we explain its formula, how to calculate, examples, benefits, and limitations in detail. You may learn more from the following articles –

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