The definition of income per capita is simply the average amount of money earned by people living in a specific area. Usually, per capita calculations are done for cities, states or nations, but there is no fixed rule about what region can be defined per capita. Income per capita is an important economic criterion in everything from domestic governance to international diplomacy, as it provides a benchmark to judge progress. It’s far from perfect, but it’s the critical baseline by which economists monitor regional financial growth.
Income per capita is the average amount of money earned by people living in a specific geographical region.
The Definition of Income Per Capita
For understanding the per capita income meaning, it helps to understand that per capita basically means per person. This includes every person in the region that is being analyzed. It includes babies, housewives, students and the retired, who are all probably not contributing much, comparatively speaking, to the economic engine in the region. This "everyone counts" aspect is both a strength and a weakness in the per capita income indicator model.
What is Per Capita GDP?
GDP is the gross domestic product, or the total financial output of a country. The definition of GDP per capita is when the GDP is divided by the country’s population to show the national breakdown of a country’s economic output in relation to its population. This is an especially useful financial indicator because it gives economists a viable comparison of different countries’ economic performance.
What Does GDP Per Capita Tell Us?
When a country has a per capita GDP increase, it shows that their economy is strong, and wealth is increasing. However, wealth increasing is a relative point because the income gap can grow while wealth grows too, as exemplified by the old adage that "the rich get richer and the poor get poorer." This is one of the problems with using an average of all data, since high and low incomes vary vastly. As a result, though the GDP per capita calculation is often used as a standard of living indicator, it has its flaws.
For instance, the United States' per capita GDP for 2016 was $57,466.79, while its per capita income was $29,829, both of which suggest a healthy national economy. However, on a personal level, these figures can hide the reality that 14 percent of Americans were living in poverty in 2016 to the tune of 43.1 million people, with $12,486 being the poverty threshold for a single individual under the age of 65. Meanwhile, billionaire Bill Gates is estimated to earn more than $23,000 per minute.
Is India a Rich Country or a Poor Country?
India is a classic example of how going by the numbers can be misleading. Based on total individual wealth in 2016, India had over $5.2 trillion in its people’s coffers, which puts it in the world’s top 10 wealthiest economies. By that number, it's a rich country, right?
Break that down by the 1.35 billion who live in India, though, and suddenly you have a GDP per capita of just $6,658, which means India is ranked 126th in the world for personal income in 2016. And that number still doesn’t tell the whole truth because according to the World Bank, 58 percent of India’s people were living on just $3.10 per day in 2014, or about $1,128 per year.
India’s economy may be growing, but it’s also a case of that proverbial “rich getting richer and poor getting poorer,” since the cost of living is increasing as a consequence of their economy growing.
Ultimately, using a per capita income calculation can be useful, but it’s important to understand the limitations of using these statistics without taking a closer look at where the wealth is in any given place. In 2017, the financial organization Credit Suisse issued a report stating that more than 50 percent of the world’s wealth was owned by just 1 percent of the world’s population. With top-heavy numbers like that, playing by averages with per capita statistics will always be a fuzzy picture at best.