How is Per Capita Income Calculated?

Per capita, income is an important economic indicator used to measure the average income earned per person in a country or region over a specific period. It provides insight into a population's standard of living and economic well-being. This article will explain what per capita income is, the formula for calculating it, why it is significant, and the limitations of this measurement.

What is Per Capita Income? 

Per capita income, often abbreviated as PCI, is the average income earned per person in a given area over a specified period. It is determined by dividing the area's total income by its total population.

For example, India's per capita income is calculated by taking India's national income (i.e. GDP) and dividing it by the entire Indian population. This roughly estimates how much money the average Indian citizen earns annually.

Some key things to note about PCI:

• It measures income per person and not per household or family
• It looks at average income earned, not total accumulated wealth 
• Can be calculated for any geographic area - cities, states, countries, regions
• It is usually calculated on an annual basis, reflecting the previous fiscal year

The Formula for Calculating Per Capita Income

The formula for calculating per capita income is straightforward:

Per Capita Income = Total National Income / Total Population

Or, 

PCI = NI / P

Where,

• PCI = Per capita income 
• NI = Total national income
• P = Total population

To calculate it:

1. Determine the total national income for the geographic area and period you want to analyse, typically using GDP or GNP.

2. Determine the total population for that geographic area during the same period. 

3. Divide the total national income (GDP/GNP) by the total population to arrive at per capita income.

Most often, PCI is calculated using nominal values for both income and population. However, adjusting for inflation using real GDP values allows for more accurate comparisons over time.

Why Per Capita Income Matters

1. Standard of Living Indicator

Per capita income is a way to measure how well a country's economy is doing and how good the living standards are for an average person. By comparing this measure across different countries and over time, we can see how much a country has developed and grown economically.

When the per capita income is higher, it usually means that people have better lives, including access to healthcare, education, public services, and overall economic prosperity. However, when the per capita income is low, it can mean that many people are struggling with poverty and hardship.

2. Measure of Economic Productivity 

Per capita income (PCI) measures how much money each person in a country makes on average. It tells us how well the economy is doing and how productive the people are. 

When the PCI is high, it means that people are able to produce more goods and services, which leads to better wages, more job opportunities, and higher personal income. 

When technology, innovation, and infrastructure improve, productivity increases, and PCI tends to rise as a result. If the PCI stays the same or goes down, it means that the economy is not doing well and progress is slow.

3. Basis for Resource Allocation

Per capita income figures guide governments and policymakers when planning budgets and distributing resources across regions. Areas with lower PCI typically need more public funding and schemes allocated to them.

Multilateral agencies like the World Bank use PCI thresholds to categorise developing countries as low, middle or high-income countries. This determines their aid policies and lending programs.

Limitations of Using Per Capita Income

While a handy metric, per capita income has some key limitations:

1. Doesn't measure income distribution - PCI only provides an average income not how income is distributed across the population. Two countries can have the same PCI but vastly different levels of inequality. Using median income along with PCI provides a better picture. 

2. Doesn't account for non-monetary factors - Quality of life depends on many things beyond income like healthcare, environment, freedom, and safety. Populations with similar PCI can have vastly different living standards based on these other factors.  

3. Can be skewed by extreme incomes - If a country has very high income inequality, its per capita income figure may be disproportionately pulled up by very rich people, even if most of the population is poor. Using median income helps correct this.

4. Ignores differences in cost of living - Populations with similar PCI may not have similar real purchasing power if the cost of living differs substantially between countries. Adjusting using PPP helps minimise this limitation.

5. Says nothing about accumulated wealth - Per capita income provides yearly income flow. It does not capture the total wealth and assets individuals hold in a country. 

To supplement PCI, metrics like the Gini coefficient, Human Development Index, and GDP PPP Per Capita offer a better view of living standards.

How India Calculates Its Per Capita Income (Example)  

India's per capita income (PCI) for the fiscal year 2022-23 was estimated to be Rs 1,97,938. This means the average Indian citizen earned approximately Rs 1.98 lakhs over the past year.

This was derived using the following method:

As per budget estimates, India's Gross National Income for FY 2022-23 was projected to be Rs 232.15 lakh crore or 232,150 billion rupees.

Meanwhile, India's population, as per the latest census in 2021, was approximately 1.32 billion (132 crore) people.

So, the Per Capita Income is calculated by:  

• National Income = Rs 232,15,000 crore 
• Population = 132 crore
• Per Capita Income = National Income / Population 

           = Rs 232,15,000 crore / 132 crore

  = Rs 1,97,938

Therefore, India's PCI for 2022-23 was Rs 1.98 lakh annually or around Rs 16,500 per month. This reflects a steady growth from previous years, indicating a rise in prosperity for the common Indian.

However, India's PCI remains much lower than developed countries. Also, income inequality is quite high, with the top 10% of income earners making many times more than the median citizen.

Conclusion

Per capita income is a starting point to measure a country's income levels, but it has limitations. A multi-dimensional view using metrics like GDP growth, income distribution indices, and Human Development Indicators gives a more subtle perspective on living standards. Nonetheless, PCI is widely used for macroeconomic analysis and cross-country comparisons. Understanding what drives PCI growth and translating it to human development is imperative for balanced and sustainable prosperity