Gross domestic product (GDP) per capita is also known as income per person. It is the mean income of the people in an economic unit such as a country or city. GDP per capita is calculated by dividing GDP by the total population of the country.
GDP per capita income as a measure of prosperity
GDP per capita is often used as average income, a measure of the wealth of the population of a nation, particularly when making comparisons to other nations . It is useful because GDP is expected to increase with population, so it may be misleading to simply compare the GDPs of two countries. GDP per capita accounts for population size.
Comparisons of GDP per capita
GDP per capita varies across countries and is highest among developed countries. However, GDP per capita is not an indicator of income distribution in a given country. For this reason GDP per capita may not necessarily be a barometer for the quality of life in a given country.
Per capita income is often used to measure a country's standard of living. It is usually expressed in terms of a commonly used international currency such as the Euro or United States dollar. It is easily calculated from readily-available GDP and population estimates, and produces a useful statistic for comparison of wealth between sovereign territories. This helps countries know their development status.
However, critics contend that per capita income has several weaknesses as a measure of prosperity, including:
- Comparisons of GDP per capita over time need to take into account changes in prices. Without using measures of income adjusted for inflation, they will tend to overstate the effects of economic growth.
- International comparisons can be distorted by differences in the cost of living between countries that are not reflected in exchange rates. When looking at differences in living standards between countries, using a measure of GDP per capita adjusted for differences in purchasing power parity more accurately reflects the differences in what people are actually able to buy with their money.
- As it is a mean value, it does not reflect income distribution. If the distribution of income within a country is skewed, a small wealthy class can increase GDP per capita far above that of the majority of the population. Median income is a more useful measure of prosperity than GDP per capita because it is less influenced by outliers.