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When economists discuss the standard of living, they refer to the average quantity and quality of products and services that a country’s citizens can afford to consume. Because real GDP represents the number of goods and services produced, GDP per Capita, or real GDP divided by population, is commonly used to measure a country’s economic well being or standard of living. GDP includes expenditures for environmental protection, healthcare, and education but excludes actual levels of environmental cleanliness, health, and learning. It also includes medical spending, but it does not address whether life expectancy or infant mortality have increased or decreased. Similarly, GDP counts education spending but does not directly address how many people can read, write, or do basic maths.
What is GDP?
GDP is a yearly calculation of a country’s total economic growth and activity. GDP is typically computed once a year, although exceptions are made to calculate GDP quarterly to satisfy the needs of a sudden survey. It proves to be the determinant factor in overall domestic productivity. GDP is used to calculate the size of an economy and its expansion rate. Typically, there are three techniques for calculating GDP. This is done by identifying a firm’s production, expenditures, or income values.
The most common way is to evaluate production. To calculate the total, each firm’s output is added together. The expenditure method assesses in such a manner that all of the output goods are purchased by a buyer, so the total value paid by the buyer equals the amount spent to make it. Similarly, the revenue technique adheres typically to a pre-written statement stating that the money obtained from the sale of the products must never deviate from their original value. As a result, the estimated total of the product’s income should yield the unadulterated genuine worth of the sales money.
What is GDP per Capita?
The Gross Domestic Product per Capita is calculated to determine the average financial value freed by each person in a country. Because this is calculated per person, it provides a good sense of the country’s prosperity. This indicator aids in determining a country’s place in a global index of living quality. GDP per Capita is given by dividing its total GDP by its total population. This is an excellent technique to comprehend a country’s success and permanently affix a label to the standard of living of the individuals.
Small yet wealthy countries with a highly developed industrial approach may have a higher GDP per Capita. Countries with a greater GDP but a considerable population, on the other hand, will inevitably have a lower GDP per Capita. Put another way, it is the average of what everyone in that country might make. However, this does not imply that all citizens have the same income. Only the wealthiest half of the population’s income is represented by GDP per Capita. It may vary depending on whether one is below or above the poverty level.
Per Capita Income formula
The total income earned by all individuals and the total population are the two main components of the Per Capita income calculation. It is first determined by dividing the total income of an area by the total population.
Per Capita Income (PCI)= Total Income of Area/Total Population
Limitations of Per Capita income
Because Per Capita income rises as prices rise rather than as physical output rises, it is not a reliable indicator of economic development.
As national income rises, the wealthiest get richer while the poor get poorer.
It excludes non-marketed goods and services, even if they are critical to human enjoyment and quality of life.
An increase in Per Capita income could be attributable to applying contemporary capital-intensive technologies in production, which could be labour-displacing, impacting the poor.
If the population increase exceeds the national income growth rate, the availability of goods and services Per Capita and economic welfare will decline.
A commodity’s contribution to economic well being may be more significant than its monetary value; for example, the monetary value of salt, needles, thread, and other commodities included in national income is lower than their contribution to economic welfare.
