Understanding the statistics used to evaluate different countries on a level field is key to improved geopolitical awareness. Economists need tools to evaluate distinct regions and countries that attempt to smooth out the difficulty of comparison. Per capita income is one way to evaluate relative wealth and overall well-being. Per capita income literally means income per head; it represents average income for a country or region.
Definition and Components
Per capita income equals total income divided by population. It is considered a general measure of a country's wealth and well-being. The population of a region or a country is relatively easy to estimate or count. The more complicated calculation is gross, or total, income. There are several methods available and each has its own nuance.
Gross national product (GNP), also called gross national income (GNI), is a statistic that attempts to capture the value produced by all the residents of a country in one year. Gross domestic product (GDP) calculates the value of all goods and services produced within a country and includes all domestic production by foreign entities. GDP can be calculated using different methods that often result in different values.
GDP (as a sum of expenditures) is calculated by adding private consumption expenditure, government expenditure, net investment on capital goods and net exports. Net exports is the value of exports less imports; this value can be negative if a country imports more than it exports. This is the classical macroeconomic definition of GDP. Another approach to calculating GDP is the value-added method. One records the total output of every business less the cost of the intermediate inputs. This approach captures the value added at each level of production.
Per capita income statistics are based on total income figures that can only ever be estimated. It is impossible to capture every transaction in an economy, and double counting is a danger. For example, a new car might be sold from one dealer to another before it is sold to the consumer, but it is the sale to the consumer that represents value added. Another problem with these figures is the failure to include black- or gray-market activity. The income from black and gray markets does circulate in the economy, but it is difficult to quantify and include in total domestic income.
Homogenization and Comparison
For per capita income comparisons to be viable among countries, economists will usually convert the figures into dollars using prevailing exchange rates. This can be problematic if the exchange rate has moved much over the year. To further homogenize the comparison, the dollar values can be converted into a baseline year, which will help control for and eliminate inflationary and exchange rate differences. Once values are made uniform, per capita income is a useful tool for comparison between two countries as a means of estimating relative wealth. Higher per capita income equals higher quality of life.
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