Per Capita Income - Definition, Formula, Calculation & More

What is Per Capita Income?

Per capita income is the average amount of money earned by each person in a country or area. It helps to measure how much money people typically make and is used to understand the standard of living and quality of life in that place. To calculate per capita income, you divide the total income of the country by its population.

Per Capita Income - Definition

The per capita income of India includes every individual, regardless of age, such as adults, children, and even newborns, as part of the total population. This contrasts with other common measures of prosperity, such as household income, which aggregates the earnings of all individuals living under the same roof, and family income, which considers the income of those related by birth, marriage, or adoption residing in the same household.

Formula for Per Capita Income 

Per capita income is calculated by dividing the total income of a region by its population. This national income formula reflects the average income earned by each individual within the area, providing a measure of economic prosperity on a per-person basis.

Per Capita Income = Total Income of Area / Total Population

How to Calculate Per Capita Income? 

Per capita income is a crucial economic indicator that is derived by dividing the total income of a region by its population. It helps measure the average income per person within a given area. The two primary components involved in calculating per capita income are the total income and the population size.

To illustrate how per capita income is determined, consider the following example:

Suppose a small area has 50,000 people, and the total income of that area is 50 lakh (5,000,000). To find the per capita income, you divide the total income (50 lakh) by the population (50,000). So, 50,00,000 ÷ 50,000 equals 500 rupees.

Similarly, to find the per capita income of a country, you divide the country’s total income by its population. The per capita income helps you understand the average income of people in that country and gives an idea of how well people are living and how prosperous the country is.

Importance of Per Capita Income 

Per capita income is a crucial economic indicator used to assess the financial well-being of a country or region. Generally, prosperous countries exhibit higher per capita income, whereas economically weaker countries tend to have lower figures.

This metric can also be used to evaluate the affordability of living in a given area. For example, if the average cost of a flat in a city is ₹80 lakhs, while the per capita income is ₹5 lakhs, it suggests that real estate in the city may be unaffordable for most residents.

Businesses often consider per capita income when evaluating potential locations for expansion. This helps them gauge the purchasing power of the local population and tailor their operations accordingly.

Additionally, policymakers frequently rely on per capita income data to design strategies that address existing economic challenges. For instance, if low per capita income is primarily due to insufficient job opportunities, policymakers may focus on attracting industries that can stimulate economic growth and improve the standard of living.

Uses of Per Capital Income

Here are two common ways "per capita" is used:

GDP Per Capita

GDP per capita helps measure the economic output of a country by considering the number of people living there. To calculate it, you divide the country's total GDP by its population. The formula is:

GDP ÷ population = GDP per capita

Gross National Income (GNI) Per Capita

GNI per capita is similar to GDP per capita, but it also includes income from investments made by the country's residents in other countries. To calculate GNI per capita, you use the same data as for GDP, plus any income earned from foreign investments. 

Limitations of Per Capita Income 

Per capita income, like any other economic or financial indicator, has its limitations. These include:

Income Inequality: Per capita income does not account for disparities in income distribution within a population, making it an unreliable measure of the standard of living for all individuals.

Inflation Impact: Per capita income fails to reflect inflation, which erodes purchasing power over time. This limitation may result in an overstatement of the population's real income, as it does not adjust for rising prices.

Exclusion of Personal Wealth: Per capita income does not consider an individual’s wealth or savings, focusing solely on income, which may not accurately reflect overall economic well-being.

Inclusion of Non-Earners: The calculation includes children, who do not contribute to income generation. In countries with a high proportion of children, such as India, this can lead to skewed results and potentially misleading interpretations of income levels.

Conclusion
Per capita means finding the average value for each person to help understand how something is shared among individuals. In economics, GDP and income per capita show the average level of wealth in a country and help compare countries. You can also use "per capita" to measure things that aren’t about money, like how much alcohol people drink or how many car accidents happen for each person.