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by 5paisa Research Team Last Updated: 2023-05-31T17:57:09+05:30
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Per capita income is a useful tool for economists, policymakers and investors to compare and analyse a country's development and economic growth. This article will provide all the relevant information about per capita income, even if you are new to the term. Let’s first explore what is per capita income.

What is Per Capita Income?

Per capita, income is a crucial economic indicator useful for calculating the average income of people residing in a particular region or country. The calculation is done by dividing the total income that all the individuals in a country earn by the area’s total population. 

Therefore, in the simplest term, per capita income helps measure each country's average income range earned by each individual. The main purpose of this calculation is to develop an economic indicator, indicating the economic well-being of a region or a country and the standard of living. 

Countries that entertain high levels of inequality in income typically have lower per capita income. This is because much of the total population earns a considerably low income. On the other hand, countries having a more or less equal distribution of income have a higher per capita income. For instance, per capita income India proves beneficial in identifying societal inequalities.
 

Understanding Per Capita Income

To know the per capita income meaning in a detailed manner, it is essential to develop an extensive understanding, including how to calculate per capita income, the uses of the per capita income formula, and its limitations. Read below to learn about these in detail. 

How is Per Capita Income Calculated?

To calculate per capita income, just divide the revenue of a region or a country earned by its total population.

Therefore the formula to calculate per capita income is as follows:

Per Capita Income = Total Income of Area / Total Population of that particular region

This total income includes all the various types of income earned by the people inhabiting a country, involving salaries, wages, profits and any other income sources, such as from foreign sources like foreign investment and remittances. 

Similarly, the total population includes all the residents in a country irrespective of their legal status or nationality. Both non-citizens and citizens of the particular place inhabiting a country for an extended period come under the total population. 

The calculation of per capita income is typically calculated every year and expressed in a particular currency like Rupees, Dollars, or Euros. 
 

Uses Of Per Capita Income

Per capita income is a powerful economic tool and carries several uses. Below are some of the most effective uses of per capita income that benefit the economy. 

Determining The Inequality In Income:

Per capita income exposes income inequality in a particular region or country. Countries that entertain higher per capita income have an even income distribution, while those with lower per capita income entertains uneven income distribution. 

Proves Helpful In Comparing The Economic Development:

It also acts as a potential indicator of the economic development of a country in terms of the standard of living of the inhabitants and the population’s overall economic well-being.

Proves Beneficial For The Development Of Economic Policy:

A country's policymakers use a per capita income formula to develop various economic policies tailored to the population. Through this, they can pay more attention to the specific areas that require economic development. 

Helps In Making Informed Investment And Marketing Decisions:

Investment and marketing decisions are two of the most fundamental driving force. Per capita income helps investors and marketers make informed decisions about it by revealing the purchasing power of the people in a particular region and assuming the demand for their product.
 

Limitations of Per Capita Income

Although being an important economic tool, it possesses some limitations, which are discussed below:

Living Standards:

As the per capita income formula is the division of the total income of the individual reading in a particular region by the total strength of the population, it fails to accurately represent the region's living standard. In other words, it doesn’t provide a true picture of the standard of living in that area. 

Inflation

The inflation of a country is not reflected by per capita income. Inflation is the rate at which prices increase with time. For instance, if the per capita income of a country rises by 10% more than that of the previous year, a 10% increase in annual income will be registered. It, however, doesn’t take into account the rate of inflation. Therefore if the rate of inflation is 3%, in reality, the income would only rise by 7% and not 10%. 

International Comparisons

While making international comparisons, there can be inaccuracy in the cost of living differences. This is primarily because the exchange rate is not included in the calculation. 

Savings and Wealth

Another drawback of per capita income is that it doesn’t consider the savings and wealth of the individuals. For instance, a person coming from a wealthy family might have a low annual income but can withdraw from the savings to maintain a high-quality lifestyle. Therefore the per capita income would present the wealthy as a person with low income.

Children

One of the most crucial drawbacks is that the total population involves children who are a potential candidates for earning money. Therefore they only increase the total number of people residing in a country to be divided by the total annual income of the entire population.

Economic Welfare

Per capita, income doesn’t capture the welfare of the people, such as better working conditions, health benefits, and a total number of working hours, among many more. As a result, it doesn’t accurately represent the community’s overall welfare. 
 

Conclusion

To sum up, per capita income by country serves as an essential economic indicator to assume the country's economic welfare and highlight why special attention needs to be given. Investors, people in business and policymakers need to make informed decisions encompassing the future growth and development of the country.

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