Per capita income is a measure of the average income earned by each person in a given population or region. It is calculated by dividing the total income of a country or region by the total population. A well-known economic measure, PCI helps in quantifying and understanding the standard of living and quality of life for a population or area.
In contrast to other economic measures of income that take employment into account, Per Capita Income considers every individual within a population or geographical area. It implies that those without jobs, including kids and the homeless, are also considered when computing PCI. As a result, compared to the average employment income per country, per capita income is a less accurate representation of the average national income.
Significance of Per Capita Income
Per capita income is an important indicator of the economic well-being of a population. It gives us an idea of how much income is available to each individual in a given population. This information can be used to make comparisons between different countries or regions, to identify patterns of economic growth or decline, and to evaluate the effectiveness of policies aimed at improving living standards.
In addition to being a useful tool for economic analysis, per capita income can also have practical implications for individuals and families. A higher per capita income generally means that people have more money to spend on goods and services, which can improve their quality of life. It can also be an important factor in determining access to education, healthcare, and other essential services.
Per capita income is a great tool for managing wealth between countries since it serves the primary objective of presenting the average income of a nation. When expressed openly, PCI increases allow national leaders to realise their wealth and successful economic measures throughout the year.
When per capita income falls, national leaders have time to plan, assess what went wrong, and devise solutions to buck the trend.
Drawbacks of Per Capita Income
The user of per capita income must be aware of several limitations and defects in the method. Below is a detailed explanation of the drawbacks:
Does not consider inflation
This statistic does not consider the requirement to compensate for inflation when comparing per capita income across time. The figure tends to exaggerate the precise benefits of economic growth for a region or country because inflation needs to be considered.
Skewed distribution of Income
Since PCI is a mean value, it is assumed that it can properly depict income distribution across the population. However, due to the significant disparities in income between households with below-average incomes and those deemed to be economically prosperous, the distribution of income is typically markedly skewed.
Does not consider exchange rates
The measurement does not consider exchange rates for international comparison. The perception of the standard of living may, therefore, be diluted if the exchange rate is not considered. Specifically, per capita income should be modified to account for regional variations in buying power parity.
Not comparable to other methods
As previously elaborated, per capita income considers the total population of a given area, rather than only the employed and earning members of the community. When compared to tools and methods assessing the demographic of the employed population, PCI yields a less accurate representation of the average income.