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We must all have heard how a country’s Gross Domestic Product (GDP) is increasing or decreasing and how the development in a country is being slowed down or moving faster. Per Capita GDP is an important economic tool to understand how much wealth is created in a country and how wealthy its people are. It also helps measure the standard of living in a country.
For example, a bigger country might have larger GDP than another smaller country. But the smaller country could be wealthier than the bigger country. And Per Capita GDP quantifies that fact. Let’s learn more about what Per Capita GDP is.
What is Per Capita GDP?
First and foremost, it is necessary to understand how the GDP is calculated to comprehend the Per Capita GDP. A country’s GDP is the value of all the goods and services produced by the country in a specified time period. GDP is used as a broad measure to determine a country’s economic progress.
A country’s GDP is linked to its political boundary. This means the account of money received from goods and services in the country is only related to that country, even if companies from other countries work there. If a country’s services (where GDP is to be calculated) are provided abroad, this will also be counted under its GDP.
Once you have a country’s GDP, it is easy to understand Per Capita GDP. It is the ratio of GDP to the population of a country. Per Capita GDP is one of three factors that help measure the Human Development Index of a country.
How is Per Capita GDP Calculated?
To put it in simple terms, Per capita GDP = GDP / Population of the country.
Example: India is a healthy economy with a GDP figure of Rs 147.72 trillion in 2021. And according to the Indian census, the population of India is 139 crores.
To ascertain the Per Capita GDP, we need to apply the formula.
Per capita GDP of India = Rs 147720000000000 / 1390000000
This amounts to Rs 1,06,273.381294964 and $ 1,392.28. Which is India’s estimated Per Capita GDP.
How does GDP compare to Per Capita GDP as an economic tool to measure progress? Let’s take a look.
Comparison between GDP & Per Capita GDP
How do GDP and Per Capita GDP compare against each other?
GDP is the primary measure of the economy of any country. It shows the economic condition of that country by measuring the value of goods and services produced in the country. It defines a broad measure of a country’s economic progress and is considered a powerful tool that indicates development and progress.
On the other hand, Per Capita GDP helps the government and its economists understand the economic condition of their country in detail. Per Capita GDP is essential for any country to strategize the next steps to improve the living conditions of their citizens. Per Capita GDP also estimates how much people living in any country earn per year, on average. Per Capita GDP is an insightful tool to compare a country’s progress and wealth with other countries.
For example, a country with a considerable GDP might have a lower Per Capita GDP because its population is much larger than the other country.
There are also drawbacks to Per Capita GDP, as per critics.
Criticism of Per Capita GDP
Many economists have asserted that Per Capita GDP needs to consider inflation while being used as a comparison tool to study the progress of different countries. Not adjusting for inflation tends to overstate a country’s economic growth while calculating Per Capita GDP.
There is also the suggestion that the differences in cost of living do not reflect in the exchange rates of currencies of different countries. So, comparing the Per Capita GDP of countries might not be accurate in such cases.
Per Capita GDP does not show the actual economic progress of the society since it is only a mean value and does not show the distribution of wealth. For example, the poorer section of a country might be impoverished, and the wealthy might be extremely rich.
Per Capita GDP does not consider barter services and only quantifies monetary exchanges. It also does not consider factors like health, education and infrastructure of an area.
Conclusion
It is possible to assert that Per Capita GDP is a tool capable of measuring the health of a country’s economy. It is a better tool than GDP to understand the quality of life in a country and helps in comparing the wealth of nations. But there are drawbacks to Per Capita GDP; it does not show wealth distribution in a country.
