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Define the term per capita income. Show its usefulness and highlight some of its inherent shortcomings

      

Define the term per capita income. Show its usefulness and highlight some of its inherent shortcomings

  

Answers

Gregory
Per capita Income – the National Income per head which is given by dividing National Income by the total population of a country in a year.
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It shows the standard of living a country can afford for its people. The level of income per capita is determined by the size of a country?s population. The higher is the rate of growth of population, the lower is the rate of growth of income per capita. Per capita income is a theoretical rather than a factual concept. It shows what the share of each individual?s National Income would be if all citizens were treated as equal. In real world situation, there exists considerable inequality in the distribution of income especially in third world countries. The composition of output may change e.g the defence –related goods may be produced and less spent on social services or consumer goods; standards of living depend on the quantity of
consumer goods enjoyed. Overtime, price will change. The index of retail prices may be used to express the GNP in real terms but there are well known problems in the use of such methods e.g the problem of weighting etc. National income may grow as well as per capita income figures but this is not representative of the distribution of income. A small group may be better off while others have static or worse off welfare standards.
There is also a possibility for an increase in Income per capita to be accompanied by deteriorating working conditions arising from eventualities like environmental pollution. These non-monetary aspects are not well taken into account when estimating GNP and GNP per capita. Moreover, National Income increases when people pay for services which they previously carried out themselves. If a housewife, for instance, takes an office job and pays someone to do her housework, National Income will increase to the extent of both persons? wages. Similarly, a reduction in National Income would occur if a person painted his house instead of hiring a professional painter. Changes of this nature imply that changes in the GNP per capita will only largely misrepresent changes in the standard of living. Sometimes even the estimation of the total population fails the test of accuracy necessary for the reflection of the true perception e.g underestimation of the population figure would imply
an overstatement of the GNP per capita, and thus failing to reflect the true state of welfare.
Gregorymasila1 answered the question on March 2, 2018 at 18:18

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