What is Per Capita Income?

In the world there are different types of companies, some countries are rich and some are poor. Also we also hear that some countries are developed and the other is a developing company. Have you ever wondered how the experts decide this?

Per Capita Income (PCI) it is one of the simplest ways which helps us to identify this. 

In this blog we will be learning about Per Capita Income, how it is calculated and the benefits of Per capita income. 

What is Per Capita Income? 

Per Capita Income (PCI) is the average amount of money earned by each person in a country in a given period of time, generally a year. The term “per capita” means per head. So, it’s the average income per head.

In Per Capita Income, the calculation includes all the individuals consisting of working adults, retired persons, college students, and even newborn children. PCI is not considered as an average salary of a working person, rather it is the average income that is spread across the entire population. Per capita income is generally used to check the financial health of a country.    

How is Per Capita Income Calculated?

The formula to calculate Per Capita Income is simple and you only require the data of a country’s total income and the total population of the country to find it accurately. 

Formula: Per Capita Income = Total income / Total Population  

Let’s understand it by a simple example:

Imagine a small village in India with a population of about 1,000 people. Here you need to find out the total working people in the village and let’s say they collectively earn Rs.5 cr. in one year then, 

Per Capita Income of the Village = Total Income (5 Cr) / Total Population (1,000) = 50,000 income of an individual per year

Therefore the Per capita income of the village is Rs.50,000/year. This gives us a single number to understand the average income in India for that village.

You must be curious about “Total National Income” and how we get it. This is closely related to GDP (Gross Domestic Product), it is important to understand the difference between GDP and PCI.

GDP is the total value of goods and services produced in a country within a given year, on the other hand PCI is the average income earned by each person in the country in a given time (a year).   

Read Also: What is Earnings Per Share (EPS)?

Why is Per Capita Income Important?

PCI is a very useful tool for the following reasons.

• Standard of Living: It helps us in knowing the standard of living in a country, here a higher per capita income generally indicates that the people can purchase more goods and services, quality healthcare and better education.   
• Better Decision Making: PCI is also used by Governments to understand which parts of the country are doing well and which part needs attention. If any of the states have low PCI then the government might allocate more resources and give opportunities to increase the PCI.   
• Helpful for Businesses: Businesses use this data to decide how and where they can expand their operations or sales, like a company selling expensive laptops will preferably target cities with a high PCI, as people there would have more purchasing power.   
• Country comparison: PCI also helps in comparing the economic health of different countries. Some organizations like the World Bank use Gross National Income (GNI) per capita which is identical to PCI, to classify countries into different income groups. Currently India is classified as a lower middle income economy.  

Problems associated with Per Capita Income

The biggest challenge associated with PCI is that it excludes inequality from its search, as it is an average of the total income which can be sometimes misleading. Let’s go back to our village example where the Per capita income was Rs.50,000 but think what if one wealthy person in the village alone earns Rs.2 crores in a year and the rest of the population (999 people) earn only Rs.30,000 each. Here the total income generated by the village is still Rs.5 crore and the PCI is Rs.50,000, but in reality most of the people are earning less than the average calculated. As we can see, the massive income generated by one person can pull the average for everyone in the country. This is the limitation of PCI as it hides the gap between the rich and the poor.   

In PCI, the cost of living in different places is not considered as a person living in the village can easily live a good quality life with an income of Rs.1 lakhs a year as compared to someone who is living in a tier 1 city as everything from rent till food is comparatively expensive in the city. PCI doesn’t account for these price differences.

To correct this, economists also use something called Purchasing Power Parity (PPP). PPP adjusts the income accordingly to show how much you can purchase with given money in a specific place. In India, the PCI adjusted for PPP is much higher than the simple number, giving a better picture of the actual standard of living.   

Per Capita Income also avoids many important things that contribute to our well-being like:

• Unpaid Work: Some works are not considered or counted under PCI such as work done at home like cooking, cleaning, washing.  
• Informal Economy: A large chunk of the population in India is associated with the informal sector such as street vendors or a daily wage worker; the income generated by such people are not fully recorded in the official numbers, leading to a different PCI than reported. 
• Quality of Life: PCI does not include quality of life factors like public transport, clean air, safe roads, high-quality hospitals, or how much free time people have. A country may have a high PCI but might have a bad quality of life.   

Read Also: 20 Side Income Sources Apart From Full-Time Salary

Conclusion

Per Capita Income helps us in getting the gist of a country’s economic health. It helps us in making a broad comparison of the economies and helps us in understanding the economic trends of the countries.

However, it is among some few numbers that are calculated in a country’s GDP. PCI helps in understanding how well a country, its economy and its people’s average income. Though we shall also consider other factors like income inequality, the cost of living, and all the non-monetary things as well.

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