How do we measure economies? Apart from the GDP, what more value-added indicators can we use? Let’s look at a few indicators that help us predict the overall status of the economy.
What IS PER CAPITA INCOME
Per Capita Income or total income measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area’s total income by its total population, ie national income by population size.
Per capita income is often used to measure a sector’s average income and compare the wealth of different populations. It also measures a country’s standard of living and is usually expressed in terms of commonly used international currency like the USD or Euro.
USES OF PER CAPITA INCOME
It has proven to be beneficial in comparing different populations (countries) and helps assess economic growth and fluctuations. PCI at domestic levels also measures per se the affordability of an area. For example, using the data on real estate prices, we can determine if an average house is within the budget of an average income-earning family.
In this case, expensive areas such as Manhattan and San Francisco maintain extremely high ratios of average home price to income per capita and can hence be considered unaffordable for the particular family.
Businesses can also use per capita income when considering opening a new outlet in a town or region. If a town’s population has a high per capita income, the company has a higher chance of generating revenue from selling their goods since the people would have more spending in comparison to a town with a low per capita income.
LIMITATIONS OF PER CAPITA INCOME
Although Per Capita Income is a popular metric, it has a fair set of drawbacks. Per Capita Income accounts for children, who do not contribute towards the wealth generation.
Hence, countries with more children might have a skewed result as the income gets divided by the population. Per Capita Income also does not take into account wealth or savings.
An individual might have a low annual income and still have a higher standard of living through savings or previously earned wealth.
There is no accuracy in the standard of living. It takes into account the average and does not show the build-up of each individual’s contribution.
FOR EXAMPLE
Let’s say 100 families earn $50,000 annually while 50 families earn $100,000. When we take the PCI, we do (100*50,000)+(50*100,000)/150, and that gives us $66,666.67. Now, this number does not give a true picture of the standard of living, nor does it show the distribution of wealth.
Welfare indicators like working conditions, number of hours worked, education qualifications, and health benefits are all not a part of the Per Capita Income and hence the overall welfare of the community may not be reflected.
It is important to consider that Per Capita Income is just a metric and should be used in conjunction with other socioeconomic indicators.
To know more about Per Capita income, checkout Investopedia here!
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