Real GDP Per Capita

Updated on April 17, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Real GDP Per Capita?

Real GDP per capita is the resulting value calculated by dividing the entire economic output of the whole country by the total number of people and after adjusting any impact of the inflation prevailing in the country for that period. Real GDP per capita is used to compare the living standard amongst countries over time, reflecting the feelings of all the citizens about the prosperity of their country.

What Is Real GDP Per Capita

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The understanding of the real GDP per capita formula requires a basic overview of GDP, real GDP, and per capita. These measure the country’s annual production, inflation-adjusted calculation, and income per person respectively. Factors such as growth in population and business cycles can have an effect on the growth of the equation.

Key Takeaways

  • The amount obtained by dividing the whole economic production of the entire nation by the entire population during a particular year leads to the derivation of real GDP per capita.
  • It is one of the right metrics for the world’s leaders since it aids them in determining where the money can be spent to optimally use their resources.
  • Economists do not consider the profits of those who labor in the country freely and illegally when calculating it. As a result, it does not accurately reflect the nation’s average annual per-citizen income.

Real GDP Per Capita Explained

Real GDP per capita refers to the measurement of total economic output in a country during a specified period divided by the country’s total population during the same period. It considers the inflation prevailing then. This helps measure the actual level of increase in the goods and services during the period in the company.

It helps in comparing the standard of living that is present in the different countries of the world. Its calculation does not consider the cost of living of the person of their country, and the wealth spread in the country. Also, the details of the earnings of the illegal workers and the people who are working voluntarily in the country are not mentioned. It does not give any indication of the spending power of the country’s people.

This per capita GDP helps measure almost everything that the country creates annually. It is used to compare the living standard amongst countries over time, reflecting the feelings of all the citizens about their country’s prosperity. However, it does not take into consideration a lot of things, including the cost of living of the person, the wealth spread, the details of earnings of the illegal workers in the country, etc.

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Equation 

Based on the availability of data, the formula differs. For the sake of this example, let us assume we know the real GDP and population. Therefore, the formula would be:

Real GDP Per Capita = Real GDP/Population

Calculation Example

Say, the real GDP in a country, for the year 2018 is $ 10 trillion, and during the same year, the country’s total population is 250 million, i.e., there are 250 million people in the country during the year 2018. Calculate the Real GDPCalculate The Real GDPReal GDP can be described as an inflation-adjusted measure that reflects the value of services and goods produced in a single year by an economy, expressed in the prices of the base year, and is also known as "constant dollar GDP" or "inflation corrected GDP."read more per capita of the country under consideration for the year 2018.

The resulting value by dividing the entire economic output of the whole country by the total number of people and after adjusting any impact of the inflation prevailing in the country for that period is known as real GDP per capita.

The formula for it is as follows:

Real GDP Per Capita formulaReal GDP Per Capita FormulaThe real GDP per capita calculates a country’s total economic output per person after adjusting inflation. Real GDP per capita is calculated by dividing the country's real GDP by the country's population. Real GDP per capita = Nominal GDP/(1+ Deflator)/Populationread more = Real GDP / Population

Where,

  • Real GDP = $ 10,000,000,000,000
  • The population of the country = 250,000,000

Calculation of Real GDP Per Capita

Real GDP Per Capita Example 1
  • = $ 10,000,000,000,000 / 250,000,000
  • = $ 40,000

So the real GDP per capita of the country is $ 40,000 for the year 2018.

Advantages & Disadvantages

There are several different advantages and disadvantages associated with the concept. They are discussed in detail through the points below:

Advantages

Disadvantages

  • One of the disadvantages of the real GDP per capita is that it does not consider the cost of living of the person of their country in account while calculating.
  • It calculates an average figure. Due to this, it is not possible to get the output from it regarding the distribution of the income among the country’s people, i.e., it does not tell how the wealth is spread in the country. It is possible that fewer people in the country have the maximum amount of wealth, and there could be a huge amount of gap between the rich and poor of the country. Therefore, health distribution cannot be seen with the help of the real GDP per capita.
  • Real GDP per capita does not consider the details of the earnings of the illegal workers in the country and the people who are working voluntarily in the country. Due to this, real GDP per capita does not tell the exact details of the country’s average income per citizen in a year.
  • With the per capita GDP, the average annual income is derived from the people of the country, but it does not indicate the spending power of those people in the country.

Frequently Asked Questions (FAQs)

How come real GDP per capita is superior to real GDP?

Compared to GDP alone, it provides a significantly better indication of living standards. Since a country’s national revenue naturally varies with its population, it makes sense that as the population grows, so does its GDP.

What makes real GDP per capita useful?

An excellent indicator of a nation’s standard of living is the GDP per capita, which divides a nation’s economic output by its entire population. So it is because it reveals how prosperous a nation feels to each of its residents.

Exactly why is real GDP per capita superior to real GDP?

Compared to GDP alone, the it offers a significantly more accurate assessment of living standards.

This has been a guide to what is Real GDP Per Capita. Here we explain the concept along with the formula, calculation example, advantages & disadvantages. You can learn more about accounting from the following articles –

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