Per Capita GDP

What is per capita gross domestic product?

Often termed as just per capita GDP, Per capita gross domestic product refers to a measure that is used to calculate a nation’s economic output per individual.

It is observed that developed, small and prosperous countries tend to have high per capita GDP. This metric is used globally by economists to analyze a nation’s prosperity and compare it with other countries. 

The below-mentioned formula can also be used to calculate per capita GDP:

Market value of the finished goods and services / Population of the country

Economists commonly use it because the components used to calculate per capita GDP are tracked regularly. Countries growing through technical advancements will observe an increase in their per capita GDP.

While comparing per capita GDP with other countries, it is advisable to use per capita GDP at purchasing power parity (also termed as per capita GDP at PPP). PPP considers the different price levels in other countries, making the interpretations more accurate and justified.

Summary

• Per capita gross domestic product refers to a measure that is used to calculate a nation’s economic output per individual.
• It is used globally by economists to analyze a nation’s prosperity and compare it with other countries.
• It is advisable to use per capita GDP at purchasing power parity than per capita GDP.

1. What can we interpret from per capita GDP?

Some of the interpretations of per capita GDP are:

• The government uses it to measure the quality of life of its population.
• If a country’s population is stable and the GDP is increasing, it could be due to technological improvements.
• Countries with high per capita GDP and small population indicate that they have made a self-sufficient economy with the given resources.
• It has been observed that if the population of a country is growing faster than the GDP, it can result in negative per capita GDP even if the country has positive economic growth.

2. What could be the drawbacks of per capita gross domestic product as a measurement of living standards or quality of life?

According to a few studies done by economists, measuring the quality of life using per capita GDP is oversimplifying the process. Some of the problems of using per capita GDP as an unquestionable metric are mentioned below.

• Does not consider destructions: Per capita GDP omits the destruction and consumption of capital from the calculation, leading to illogical interpretations. For instance, if there is a natural disaster in a particular year, it will destroy building, transport infrastrctures, factories capital. The calculation of GDP includes only the rebuilding or remanufacturing of this destroyed capital and ignores the destruction factor.
• Non-market transactions: While evaluating the quality of lives of the population, the calculation of per capita GDP ignores the value added by domestic services or household activities. According to the GDP calculation, something that is priced has no value. While household activities involve many people and reduces leisure time, nothing is shown in the calculation.
• Discrepancy on quality of life: In many countries, inflation is increasing significantly, leading to an increase in the wealth of almost the average population and negligible for the rest. Due to this, per capita GDP depicts the well-being of the population as consumers and not the population's quality of life.
• Sustainability: Per capita GDP evaluates the basis of economic activities only. It does not count the negative effect of these economic activities on our environment. Economists have been making efforts to include sustainability as a factor while calculating the GDP of a country.

3. What do you understand by real GDP per capita?

The real GDP per capita is considered better when compared to per capita GDP. Real GDP per capita calculates a nation’s economic output per individual and is adjusted for inflation for the given year. This metric is also used to evaluate the standard of living in many countries.

Inflation makes GDP higher, whereas, in calculating real GDP, an actual increase in the number of goods and services is considered and not the rise in prices due to inflation of the goods and services.

4. What are the alternative measures that can be used instead of per capita GDP?

Some of the alternative measures used in place of per capita GDP are mentioned below:

• Human Development Index (HDI):

The human development index is a numeric value put together and developed by the United Nations to measure and compare the economic and social development of different countries. HDI has the edge over per capita GDP as it focuses on the actual development of the population and not just on the country’s production capacity.

• Genuine Progress Indicator (GPI):

It is used to evaluate the overall economic growth of a country. The calculation of GPI includes everything required to calculate GDP and considers the cost of adverse effects of the economic activity. These negative impacts include ozone depletion, cost of crime, etc.

• Happy Planet Index (HPI):

The New Economics Foundation introduced this method in year 2006. It measures human well-being and the environmental impact of economic activities. It is an important metric to use for evaluating the quality of life because it keeps present and future well-being at the forefront.

5. What are some of the misperceptions related to the interpretation of per capita GDP?

Some of the misperceptions are mentioned below:

• Higher-income (means higher GDP) is directly correlated with quality of life:

Higher-income can lead to a good quality of life and add happiness but only to a certain income level. A jump in income, after a point in time, will not affect the quality of life directly. Other factors like good education, equal income distribution, access to healthcare facilities add more to quality of life.

• Not to judge a country as poor on its low GDP:

If most of the workforce of the given country works in the informal sector, then their income is not included while calculating GDP and per capita GDP of the country. Due to this, these figures can misinterpret the country as poor.