Limitations of GDP Per Capita

by James Green; Updated September 26, 2017

Gross domestic product per capita, alternatively known as per capita GDP, is a measurement that approximates a country's average income per citizen per year. It is essentially the country's GDP divided by its population. Although it is often used as an approximation of a country's prosperity, it says nothing about the distribution of income, spending power, or the well-being of a country's inhabitants.

GDP Per Capita

Per capita GDP is made up of four factors. These include consumption, which is the amount of money consumers spend on goods and services; investment, which measures how much people spend on businesses and financial ventures; government expenditure, which is how much the government spends on public services; and net exports, which are a country's total exports minus its total imports. Increasing any one of these four factors will in turn increase total GDP. GDP per capita is thus used as an approximate measure of the average annual income of the country's residents.

Spending Power

Although per capita GDP gives some indication of the average annual income of a country's inhabitant, it says nothing about how far that income goes. Different countries have different price levels. What may cost 50 cents in one country may cost $5 in another. Thus, in this case, GDP per capita falls short as a measure. An alternative measure is that of purchasing power parity (PPP), which takes into account both the incomes and prices of a given country.

Income Distribution

GDP per capita is an average, and thus ignores the distribution of incomes in a given country. Although the GDP per capita of a country may be very high, it may be the case that 10 percent of the country earn millions of times more than the other 90 percent of the country's inhabitants, who earn extremely low wages. Examples of this phenomenon include China, Russia, Brazil and India. Some of the oil-producing nations in the middle east have very high per capita GDPs, but this is only due to a minority of a country of a low population making billions of dollars each year. Thus, when measuring income distribution, economists often use alternative measures like the GINI index of the Lorenz curve.

Happiness

Just because the citizens of a given country may earn very high average salaries, their general welfare, or happiness, may not be so high. Many citizens who live in the more-developed countries in the world have higher amounts of stress and less satisfaction in their lives. A measurement that rectifies this is gross domestic happiness, which uses multi-country studies on well-being. Bhutan, a small country located in the Himalayas, often ranks at the top, but tends to have a lower per capita GDP.