Per capita income (PCI) or “average income” is the measurement of average income per person in a specific country, city, or region within a definitive time period. Used primarily in economics, PCI utilizes average income to calculate and present the standard of living and quality of life for a population or area in study.
Compared to other economic indicators that measure income relevant to employment, per capita income considers every person within the population or specific area. It means that people without jobs, such as children or the homeless, get accounted for within the PCI calculation. As such, per capita income can be considered a less accurate depiction of average national income, especially compared to the average employment income per nation.
Per Capita Income Within the United States
Within the United States, the organization responsible for calculating per capita income is the U.S. Census Bureau. The United States Census Bureau conducts a survey of per capita income every ten years, revising the estimates each September.
The census conducted by the organization measures earned income, interest income, dividends, income from trusts, and other income activities such as welfare. Although it seems as if a number of income activities are included, the survey does not include income such as borrowing, gifts, food stamps, and, surprisingly, capital gains.
During calculation, the bureau gathers total income information from the previous year for every American 15 years or older. Once such information is obtained, they calculate the statistical average, thus obtaining the per capita income figure in the United States.
PCI Calculation and Example
As mentioned previously, per capita income can be measured based on a specific country, city, or region within a specific time period.
For our example, we will measure the per capita income of a country. The calculation would look something like what is shown below:
For example, the national income of Mexico in 2019 was approximately 2.55 trillion dollars. At that time, the country’s population was approximately 127.6 million. The calculation is:
As the calculation suggests, the per capita income of a Mexican in 2019 is about $20,000 or $20,078.74, to be exact.
Implications of Per Capita Income
Considering per capita income is such a widely used economic tool, it is important to know the important implications of such a measurement. Such implications are depicted below:
The main purpose of per capita income – to present the average income of a nation – is a great tool to manage wealth among nations. Using the ratio explicitly, an increase in PCI allows national leaders to realize their prosperity and successful economic initiatives during the year.
When per capita income decreases, it allows national leaders to prepare and analyze what happened and to plan measures to reverse the trend.
Considering that per capita income presents a nation’s mean income, it is a helpful tool to assess which countries require aid.
Specifically, within the United Nations, making such information available allows organizations to assess a nation’s wealth and see what assistance needs to be provided. If the nation is experiencing an economic downturn, programs and activities can be implemented to help the nation out of its slump.
When a nation experiences high per capita income, large organizations are more likely to pursue developmental opportunities within that nation.
Used more commonly within regions, PCI is a tool used by businesses. For example, the per capita income is higher in the state of California compared to New Mexico. As the composition of the states suggests, more industrialization and development lies within California.
Drawbacks of Per Capita Income
When using per capita income, the user must be aware of some of the drawbacks and flaws inherent in the calculation. The drawbacks are explained in detail below:
When comparing per capita income over time, this measurement does not consider the adjustment needed to account for inflation. Without accounting for inflation, the figure tends to overestimate the exact effects of economic growth for a region or nation.
Considering per capita income is a mean value, the figure does not accurately reflect proper income distribution. In most cases, income distribution is heavily skewed due to the wide differences between households making below-average income and households that are considered “economically rich.”
Using per capita income as a tool for international comparison, the measurement does not account for exchange rates. Not accounting for the exchange rate may dilute the presentation of the standard of living. To be more precise, per capita income should adjust for differences in purchasing power parity between countries.
As mentioned before, per capita income uses the entire population of a select area rather than just individuals who earn income. As such, people who do not earn are taken into consideration. It results in a less accurate depiction of average income compared to just measuring the employed demographic of the population.
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