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Per capita income

From Wikipedia, the free encyclopedia

Per capita income (PCI) or average income measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area's total income by its total population.[1][2]

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  • ✪ What is GDP, GNP, NDP, NNP and Per Capita Income ?
  • ✪ Top 10 Country GDP Per Capita Ranking History (1962-2017)
  • ✪ Real GDP Per Capita and the Standard of Living

Transcription

Hello friends, Welcome to PrepMate classes! In this lecture we will learn about the indicators of economic activity namely Gross Domestic Product (GDP) Gross National Product (GNP) Net Domestic Product (NDP) Net National Product (NNP) And Per Capita Income. GDP or Gross Domestic Product is the money value of all the finished goods and services produced within a country's borders in a specific time period. GDP is usually calculated annually or on quarterly basis. Thus, if foreign companies such as Vodafone, Ford and others are producing in India, the production is part of India’s GDP. This includes goods and services produced by the residents of the country within the country’s borders and those produced by foreign residents as well as companies by investing in that country. But what does GDP indicate and why are we so concerned about it? GDP indicates economic health of a country as well as the standard of living of the residents. More the GDP greater the production of goods and services which in turn indicates higher consumption level of the residents. Increased consumption level is in turn associated with a higher standard of living of the residents. Fall in GDP indicates reduced production of goods and services which in turn indicates fall in the consumption level of the residents. Reduced consumption level is in turn associated with a poor standard of living of the residents. GNP or Gross National Product refers to goods and services produced by residents of a country within and outside its borders. We can calculate GNP from GDP by adding income earned by Indians abroad and subtracting incomes earned by foreigners in India. Thus, if Indian companies such as Tata, Infosys and others are producing outside of India, the production is part of India’s GNP. But it does not include goods and services produced by foreign nationals within the country’s borders. In India’s case, value of GDP is higher than that of GNP because India receives more investment from other countries than it makes in them. NDP Production of goods and services involves consumption or reduction in value of assets used to produce goods and services. This consumption or reduction in value of asset is called depreciation. Depreciation can occur in any asset that is used for production; such as machinery, furniture and equipments. Whenever we calculate net value from gross value, we subtract depreciation out of gross value. Therefore, Net Domestic Product or NDP is calculated by subtracting depreciation from the Gross Domestic Product (GDP). Similarly, NNP is calculated by subtracting depreciation from the GNP. All the indicators can be calculated either at market price or factor cost. The factor cost refers to the cost of factors of production that is incurred by a firm when producing goods and services. For example, to manufacture a car, factor cost includes the rent of land and cost of setting up a manufacturing unit, the cost of hiring labours and salaries of employees, rent of machinery, cost of obtaining raw materials and the cost of funds used to manufacture the car. The market price is the price that the consumers will pay for the product when they purchase it from the market. For instance, when you purchase a car from the market then the market price includes the factor cost, we calculated earlier, and also, indirect taxes. Thus, taxes charged by the government are added to the factor cost. In this case, market price is higher than the factor cost. In other cases factor cost can be higher than the market price. For instance, to promote consumption of fertilizers government gives large subsidies to farmers. Thus, for final market price subsidies are subtracted from factor cost of fertilizers. Net National Product or National Income is the collective income earned by nationals of a country in a given time period. How can we arrive at National Income from GDP? GDP is usually calculated at market price. If we subtract depreciation from GDP at the market price we arrive at NDP at the market price. Further from NDP, if we subtract factor income earned by foreigners in India and add factor income earned by Indians abroad we arrive at NNp at the market price. From the NNP if we subtract the indirect taxes and add the subsidies given by government, we arrive at NNPFC i.e. Net National Product at factor cost or National Income. When the national income of a country is divided by the total population of that country we arrive at an average income known as Per Capita Income. Per capita income is a better economic indicator than GDP. There are instances when the rate of population growth is higher than the rate of increase in GDP. In such a case, although GDP increases, the standard of living of residents remains same or deteriorates. Per Capita income suffers from its own limitations. Let us assume a nation where 10% of the national income is distributed between 90% of the population and 90% of the national income is cornered by 10% of the elites. Here, the calculation of per capita income will not display the economic disparity existing in the country. We hope you enjoyed this video. Thank you. For Best learning you can watch this video along with Prepmate-Cengage UPSC series which is available online as well as offline. Book feature: complete subject in a single book with practice and past year questions at the end of the chapters. Model answers for UPSC Mains from authors. Using the application Prepmate and web portal Prepmate.in you can access comprehensive digital support in form of videos, mock prelims, answer writing practice and regular updates.

Contents

As a measure of prosperity

Per capita income is national income/total population.

Per capita income is often used to measure an area's average income and compare the wealth of different populations. Per capita income is often used to measure a country's standard of living. It is usually expressed in terms of a commonly used international currency such as the euro or United States dollar, and is useful because it is widely known, is easily calculable from readily available gross domestic product (GDP) and population estimates, and produces a useful statistic for comparison of wealth between sovereign territories. This helps to ascertain a country's development status. It is one of the three measures for calculating the Human Development Index of a country.

United States

In the United States, it is defined by the U.S. Census Bureau as the following: "Per capita income is the mean money income received in the past 12 months computed for every man, woman, and child in a geographic area."[3] (Children are counted if they are at least 15 years old.)

Critics

Critics claim that per capita income has several weaknesses in measuring prosperity:[4]

  • Comparisons of per capita income over time need to consider inflation. Without adjusting for inflation, figures tend to overstate the effects of economic growth.
  • International comparisons can be distorted by cost of living differences not reflected in exchange rates. Where the objective is to compare living standards between countries, adjusting for differences in purchasing power parity will more accurately reflect what people are actually able to buy with their money.
  • It is a mean value and does not reflect income distribution. If a country's income distribution is skewed, a small wealthy class can increase per capita income substantially while the majority of the population has no change in income. In this respect, median income is more useful when measuring of prosperity than per capita income, as it is less influenced by outliers.
  • Non-monetary activity, such as barter or services provided within the family, is usually not counted. The importance of these services varies widely among economies.
  • Per capita income does not consider whether income is invested in factors likely[according to whom?] to improve the area's development, such as health, education, or infrastructure.

See also

References

This page was last edited on 27 December 2018, at 06:38
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