Per capita income is an economic indicator, it is nothing but the average money earned by people in a specific area. Per capita income is mostly calculated for a country. This data would then be used to compare countries. A country with a higher per capita income is obviously better off than a country with a lower per capita income.

Definition

Per capita income is the measure of the amount of money that is earned per person in a given area. It can be average per person for a city, state or a country. Per capita is a Latin term which literally means ‘by the head’, here it stands for ‘per person’.

The per capita income of a country is calculated by diving the national income by its total population. A point here to note is that even children are considered in the population though they do not earn income.

How is it helpful?

The per capita income of an area helps to know how wealthy the area is or alternately how poor it is. It is an indicator of the economic stability of the area. It tells about the standard of living in that particular area.

It is a parameter used while disbursing aid, be it to an area or to countries. Those areas with a lower per capita income would be eligible for more aid as they are relatively worse off. Areas with a higher per capita income are seemingly better off and hence may not need aid or may need very little aid.

For a business, the per capita income is an indicator of purchasing power. Areas that have a higher per capita income would have a higher purchasing power. Hence, businesses can expect more purchases from such areas. This information would be used by businesses to decide which area to start a new business or open a new store. Opening a business or a store in an area with a higher per capita income would help in increased sales.

Limitations of per capita income

The entire population is considered, which includes babies, children and the aged and hospitalized, none of whom work. So, logically this does not give a correct picture of income earned by a person. Also, there would be inequality in the income in an area. There may be 10 people earning $1 million each and 100 people earning only $1,000. The average would give a wrong picture. This is a major limitation of the use of per capita income.

Further, per capita income does not consider inflation. A major problem faced by people is rising prices. This inflation is not reflected in the national income and hence the economic growth that is projected would be exaggerated. Cost of living is another parameter that is not considered.

Per Capita income of the US

In 2016, the US per capita income was $33,205[i]. This was the highest ever per capita income figure in the history of the country. In 1967, the per capita income was $2,464. In 60 years, the per capita income has increased by 13 times. This, however, does not take inflation into account.

Per capita income is the average income of an area calculated by dividing the total income by population. It is an indicator of the standard of living in the area.

[i] https://www.thebalance.com/income-per-capita-calculation-and-u-s-statistics-3305852