What Is the Distinction Between GDP Per Capita and Income Per Capita? GDP per capita is a measure of a country’s economic production per person. It aims to measure a country’s success in terms of economic growth per person. The amount of money earned per person in a country is measured by per capita income.
Is GDP per capita a proxy for average income?
Gross Domestic Product (GDP) per capita is the abbreviation for Gross Domestic Product (GDP) per capita (per person). It is calculated by simply dividing total GDP (see definition of GDP) by the population. In international markets, per capita GDP is usually stated in local current currency, local constant currency, or a standard unit of currency, such as the US dollar (USD).
GDP per capita is a key metric of economic success and a helpful unit for comparing average living standards and economic well-being across countries. However, GDP per capita is not a measure of personal income, and it has certain well-known flaws when used for cross-country comparisons. GDP per capita, in particular, does not account for a country’s income distribution. Furthermore, cross-country comparisons based on the US dollar might be skewed by exchange rate movements and don’t always reflect the purchasing power of the countries under consideration.
For the last five years, the table below illustrates GDP per capita in current US dollars (USD) by country.
Are you looking for a forecast? The FocusEconomics Consensus Forecasts for each country cover over 30 macroeconomic indicators over a 5-year projection period, as well as quarterly forecasts for the most important economic variables. Find out more.
Why is average income different from GDP per capita?
We investigate what causes this gap and how it differs across countries in our research. We examine the impact of the following factors in particular:
The GDP deflator is used to account for price fluctuations in all domestically produced final goods, resulting in GDP per capita. The consumer price index (CPI), which compensates for price changes in products consumed by households, is used to deflate household income. When the CPI grows faster than the GDP deflator, it means that households are paying more for the commodities they buy rather than what they produce.
Household surveys capture income flows solely to households that are residents in the country, but GDP per capita captures overall domestic economic output.
The national accounts are used to calculate GDP, while household surveys are used to calculate median income. Certain types of income, such as imputed rent, retained profits, and in-kind rewards, are included in GDP but not reported in household surveys. Non-response and misreporting in household surveys can also have an impact on income levels being measured.
GDP growth is measured in terms of per capita income. To account for economies of scale in consumption when living together, median income is often measured as equivalised income, which is calculated by dividing total household income by the square root of the household size. Reduced economies of scale will result in lesser increase in equivalised median income relative to a per capita income concept when average household size declines.
If incomes grow faster in the top half of the distribution while a country experiences rising income inequality, GDP per head or mean family income will surpass income growth at the median.
By gradually bringing the metrics closer together, we can learn which factors are causing the divergence. This is accomplished in five steps. To examine the impact of price adjustments, we first correct GDP per capita using the CPI rather than the GDP deflator. Second, we examine the impact of the national income concept by comparing GDP per capita to GNI per capita (both CPI adjusted). Third, shifting to mean per capita family income reveals the relative importance of various data sources. Fourth, we compare mean equivalised income to mean income expressed per capita to determine the role of changes in household size to the disparity. We compare mean equivalised income to median equivalised income in the fifth and final phase to see how important inequality is.
Our breakdown strategy for the United States is shown in Figure 2. The trajectories of GDP per capita and median income, as well as the intermediate variables, are shown on the left. It reveals that the gap was significant in most of the sub-periods, with the exception of 1995 and 2001, when median incomes remained practically unchanged. The waterfall chart on the right shows the annualised total divergence and how much of it may be attributable to different reasons by examining the evolution of various (intermediate) variables. We can see from this waterfall graphic that differences in price deflators, data sources, household size, and inequality all contributed significantly to the disparity identified.
Figure 2: Breaking down the disparity between median household income and GDP per capita in the United States.
Note: The panel on the left depicts various indicators of income growth. The waterfall chart on the right breaks down the total divergence into the five variables’ contributions.
Table 1 indicates the relative importance of each component for each of the nations in our sample. Column 1 displays the total difference in percentage points between GDP per capita and median income throughout the whole period for which statistics are available by country. The percentage point contribution of each element to the total divergence is shown in columns 2-6.
Table 1 shows the breakdown of the disparity between GDP per capita and median household income in 27 countries.
The various price modifications added an average of 0.11 percent or 20% to the average divergence. This means that consumer prices climbed faster than production prices on average. However, we show significant variation in both directions for this factor among nations (and over time).
Only Iceland, Luxembourg, and Ireland, which have huge net factor outflows to non-residents, see a significant discrepancy between GDP and national income.
When pooled across countries, the average contributes nothing to the divergence due to the mismatch between data sources (0.03 percent or 5 percent ). However, this masks significant inequalities between countries (as well as over time, as we show in the paper in more detail). The disparity between national accounts and household surveys is now commonly acknowledged as a fundamental problem in measuring living conditions (Deaton 2005, Pinkovskiy, Sala-i-Martin 2016).
On average, household size is the most important factor between countries, accounting for 0.26 percent or 45 percent of the disparity. Because of the broad reduction in average household size, there are less economies of scale from living together in homes, causing equivalised income growth to lag behind per capita income growth. It’s also the most reliable factor in terms of the magnitude and direction of its impacts across time. Denmark and Sweden are the only countries where average household size has increased (so in Table 1 this factor has a negative sign for them, indicating that equivalised income grew faster than its per capita counterpart).
Inequality has been cited numerous times in the literature as a major reason why GDP per capita is insufficient to track living standards. However, it appears to make a minor contribution on average, and it was not the most important component in the United States, where inequality expanded rapidly throughout this time.
What is the definition of per capita income?
The average income earned per person in a specific location (city, region, country, etc.) in a given year is measured by per capita income (PCI). It is computed by dividing the total income of the area by the entire population of the area.
National income divided by population size equals per capita income. Per capita income is frequently used to compare the wealth of different populations and to estimate a sector’s average income. The standard of living of a country is frequently measured using per capita income. It’s frequently represented in terms of a widely used international currency like the euro or the US dollar, and it’s valuable since it’s well-known, easy to calculate using readily accessible GDP and population data, and provides a useful statistic for comparing wealth between sovereign territories. This aids in determining a country’s level of development. It is one of the three factors used to calculate a country’s Human Development Index. Average income is another term for per capita income.
What is the formula for calculating average per capita income?
Per capita income can be used to calculate an area’s average per-person income and to assess the population’s level of living and quality of life. A country’s per capita income is computed by dividing its national income by its population.
What is the difference between GDP, GNP, and GDP per capita?
The gross national product (GNP) is defined as the entire worth of all revenue earned by citizens of a country, regardless of source. The total value of production realized by resident producers in an economic territory, on the other hand, is referred to as GDP.
Why is GDP per capita such a poor metric?
The most popular justifications for continuing to use GDP per capita as a measure of quality of life are essentially justifications for rejecting any viable alternatives. One of the major flaws with GDP per capita is that it does not take into account social inequality.
What is the worldwide average income?
The average, or mean, of all these wages is $177,142, which is grossly wrong for all seven people listed, thanks to Jordan’s extraordinarily high pay. However, everyone except Jordan has a median (sometimes known as “average”) salary of $40,000, which is roughly true.
GDP per capita, GNI per capita, GINI coefficient per nation, and median income are among the income and poverty-related measures tracked by the World Bank. The ten countries with the highest median salaries as of March 2021 are listed below. Note that all figures are in current “international dollars,” a hypothetical currency commonly used in cross-country comparisons. International dollars are not the same as US dollars, euros, or any other currency in the actual world.
Countries with the Lowest Median Income, March 2021 (PPP, Current Int$):
According to Gallup data from 2013, the global median household income was $9,733 (PPP, Current Int$) in 2013. Liberia, Burundi, Mali, Benin, Togo, Sierra Leone, and Madagascar were among the countries with the lowest median income. This information was derived from self-reported data collected between 2006 and 2012. See the table below for a complete list of nations and their median earnings in (PPP, Current Int$).
What does it mean to have an average income?
The average income earned per person in a given area (city, region, country, etc.) in a given year is referred to as per capita income. It is calculated by dividing the total income of the area by the total population of the area.