Income per capita is one of the ways to figure out a country's wealth. The gross domestic product, or GDP, is the total value of all the goods and services a country produces. If you divide GDP by the number of residents, you get GDP per capita, or income per capita. It's one of the standard national income concepts used to compare the wealth of nations.
National Income Concepts
Economists use the various national income concepts as a way to measure the performance of the economy. If, say, the American GDP drops 10% from last year, economists look for reasons the economy changed. When they understand the forces influencing GDP, they can conceive ways to increase GDP.
GDP and per capita income can also be used to compare different nations, such as the U.S. and Germany or Canada and Bangladesh. Economists can use the comparisons to understand what makes some nations more successful than others and how GDP can improve. Using methods of measuring national income with examples makes it comprehensible.
Suppose a small nation has 5 million inhabitants and a GDP of $700 million. The national income formula divides 5 million into 700 million, getting a per capita income of $140. If GDP is $700 billion, per capita income is a much healthier $140,000.
Limits of the National Income Formula
Using the national income formula for calculating GDP and GDP per capita has its limits as a tool for studying the economy.
- A high per capita income doesn't prove that everyone in the country is well off. If wealth is concentrated in a small number of hands, millions of people may be living in poverty. A prosperous nation doesn't mean the people are prosperous.
- If a significant percentage of the population is made up of children or seniors, both of whom are too young or too old to work, income per capita is even less effective as a measure of personal income.
- GDP per capita doesn't say anything about quality of life. While money certainly affects quality of life, it's not an exact relationship.
- Factors besides economic performance can make income per capita change from year to year. A wave of immigration that boosts the population will make per capita income drop even if the national economy is stable.
- Different nations may use a different national income formula to measure their GDP. Economists can't compare GDP or income per capita correctly unless all the GDPs use the same national income concepts.
- If economists measure GDP per capita in terms of the U.S. dollar, they have to account for the exchange rate and how it fluctuates.
Ways to Increase GDP Per Capita
If the population stays the same, an increase in GDP grows income per capita. There are several ways to increase GDP:
- Education and training. Greater education and job skills allow individuals to produce more goods and services, start businesses and earn higher incomes. That leads to a higher GDP.
- Good infrastructure. Without a functioning power system or good roads, a nation has limited ability to make or ship goods, and businesses have limited ability to provide services. Building a good infrastructure, including telecommunications, makes it possible to massively expand the economy and increase per capita income.
- Restrict population. China has more than a billion people. For decades, it has allowed only one child per family to reduce the population. Lowering the population can increase the GDP per capita, but forcing families to do so is a ruthless solution to the problem.
Income vs. Income Per Capita
Raising income per capita makes a nation look better in comparison to others. It doesn't necessarily translate into a better place to live if the increase in income per capita isn't shared widely among the population. If the poorest residents don't have access to education or functioning roads, they won't share the gains.
If a country wants to improve its residents' personal income, the government needs to ensure the poor are able to claim a part of the economic growth.
- Focus Economics: Economic Growth (GDP, Annual Variation in %)
- Focus Economics: What Is GDP Per Capita?
- New World Encyclopedia: Measures of National Income and Output
- Market Business News: What Is Per Capita? Definition and Meaning
- Observer: Four Recommendations for How the Poorest Countries Can Increase Their GDPs
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com