What is income per capita, You’ve probably heard of GDP. It is always news in the newspapers and sometimes in the lips of economists. If you’ve heard of the Gross National Product, you’ve either read some economic literature or heard the phrase per capita income on the news. Did you realise they are inextricably linked? Let’s look at how.
What is per capita income?
The phrase is extensively used in economics and politics as a gauge of a country’s progress. Income per capita refers to income per head – per capita is a Latin term that literally means “per head.” Per capita income computes an aggregate average of the income of each person within a specific population. As a result, you may compare your income to that of your nation, state, and city.
What factors are used in the calculation of per capita income?
To comprehend the computation of per capita income, we must first define a few economic terminology. The first is the well-known GDP.
The Gross Domestic Product (GDP) is the total value of all products and services generated in a specific time period, which is typically one year. This indicator may be used to determine if the domestic economy is increasing or contracting, for example. To calculate GDP, everything generated inside the country is considered, whether by domestic firms or global corporations operating within its borders.
GDP is not the same as GNP, which stands for Gross National Product. The Gross National Product that includes everything created by firms from the nation of origin, even if they operate in another country. The GNP is often calculated by taking the set of wealth created inside the country – the GDP – and removing the money transferred outside by foreign firms operating on its territory and adding the wealth sent to the country by national enterprises operating abroad.
Once these principles are grasped, it is time to learn how to calculate per capita income.
How is per capita income calulated?
We can calculate per capita income in cities, states, and nations. The most frequent is the computation of national per capita income, which involves dividing the value of the Gross National Product by the number of people in the country. Developed nations often have greater per capita incomes than developing countries. This is not a rule, since the number of residents is a variable. A nation might be well developed socioeconomically and have a huge population while yet have a low per capita income.
This is the situation with China: the world’s second biggest economy, with a GDP of 2.44 trillion dollars (as of 2016 statistics), does not have a high per capita income in comparison to its GDP. In 2014, the Chinese per capita income was $7,400. (World Bank data). The reason for this is China’s massive population of 1.3 billion people; to actualize the average income per person, the outcome will be unimpressive.
The contrary is also true: the UAE, for example, has an extremely high per capita income of $43,000. There are some billionaires in the nation, which has a tiny population – around 4 million people – and when income per person is calculated, the figure is considerable.
This data leads us to the conclusion that, although it is an indication of a country’s progress, it does not accurately represent the country’s reality. It ignores critical aspects for national growth, such as social inequality and income concentration. This is the case in the United Arab Emirates: income is concentrated in a small portion of the population, and thus it not correspond to the reality of most people – because only a small portion of them will have an income compatible with the value of that country’s per capita income.
