Economics

What is Per Capita Income?

Researchers measure a nation's income per person to determine overall economic health.

What is Per Capita Income?

Per capita income is an economic concept used to describe the measurement of the amount of money that is earned per individual in a given geographic region or country. It can be used to evaluate the quality of life and standard of living of the population or in determining the mean per-person income for a region. Researchers measure a nation's income per person to determine overall economic health. A per capita income of a given country is obtained through the division of the national income by its whole population. 

Per capita income takes into account the whole population of the area or country. Therefore, this type of measurement differs significantly from other types of income measurements. For example, it differs from household income in that the latter considers all people under one roof as a household and counts them as one. It also differs from family income because this one counts a family as people who are related by either adoption, marriage, or by birth.

How is it Calculated? 

Per capita income surveys in the US are carried out every ten years. The United States Census Bureau is tasked with such exercise. Some of the data included in the census are earned income, income from estates, interest income, government transfers, as well as income from trusts. However, the count does not include data such as gifts, insurance payments, capital gains, tax refunds, and money borrowed, among others. 

Why is it Useful? 

Per capita income is useful for many reasons. One of its primary uses is to ascertain wealth or lack of wealth in a given area. For example, the US Bureau of Economic Analysis uses income per capita in ranking counties based on their wealth. It also uses the same data to rank counties based on household income. Besides, per capita income is essential in assessing the affordability of the given area. For instance, average homes can use this information in conjunction with real estate data to evaluate if the given region is affordable. Cities such as Manhattan and San Francisco are notoriously expensive places, thanks to data on per capita income.

Finally, a business can utilize data on per capita income when evaluating to open stores in a particular region or town. In case the area has high per capita income, then the firm may be in a better position of generating profits from selling its products. This is because the people around such a place will have more money to spend as compared to a region with low per capita income.

Disadvantages of Per Capita Income

However, per capita income is disadvantageous in some ways. For instance, this method does not always indicate an accurate representation of the living standard of the people. This is because it uses the overall income of the population and divides the result by the whole population. Consequently, it gives a false impression that everyone within the given population has an income. Another limitation is that it does not reflect the issue of inflation within the economy. Besides, it may be inaccurate when comparing the cost of living between countries.     

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