What Is Gross domestic product per capita?
Gross domestic product per capita is a macroeconomics measure that divides a country's total economic output, known as gross domestic product, by its total population. This calculation provides an average measure of economic production and income per person in a given country for a specific period, typically a year. Gross domestic product per capita serves as a fundamental indicator for assessing the average standard of living and economic well-being within a nation. It helps analysts understand the relative prosperity of a country's inhabitants and compare it across different regions or over time.
History and Origin
The concept of measuring national economic activity, which eventually led to gross domestic product (GDP) and subsequently gross domestic product per capita, gained prominence in the 20th century, particularly after the Great Depression and World War II. Economists and policymakers sought standardized ways to track economic performance and inform policy decisions. Simon Kuznets, an American economist, played a pivotal role in developing the initial framework for national income accounting in the 1930s. His work laid the groundwork for what would become modern GDP measurement. The international standard for measuring GDP is contained in the System of National Accounts (SNA), a collaborative effort compiled by various global organizations, including the IMF, European Commission, Organization for Economic Co-operation and Development (OECD), United Nations, and World Bank.5 This standardization allowed for more consistent comparisons of economic data, including gross domestic product per capita, across countries.
Key Takeaways
- Gross domestic product per capita is a key macroeconomic indicator representing a country's total economic output divided by its population.
- It provides an average measure of a nation's economic productivity and the income available per person.
- The metric is widely used to compare the economic growth and prosperity between different countries.
- While useful, gross domestic product per capita has limitations, as it does not account for income inequality or non-market activities.
- It is often employed by international organizations like the World Bank to categorize countries as developing countries or developed countries.
Formula and Calculation
The formula for calculating gross domestic product per capita is straightforward:
Where:
- Nominal GDP: The total monetary value of all final goods and services produced within a country's borders during a specific period, typically a year, measured at current market prices. This represents the nation's national income.
- Total Mid-Year Population: The total number of people residing in the country at the midpoint of the measured period. This ensures the population figure aligns with the period of economic production.
This calculation provides a per-person average of the economic activity.
Interpreting the Gross domestic product per capita
Interpreting gross domestic product per capita involves understanding its role as an average. A higher gross domestic product per capita generally indicates a greater level of productivity and economic prosperity in a country, suggesting that, on average, individuals have access to more goods and services. Conversely, a lower figure can point to lower levels of economic development.
When evaluating this metric, it is crucial to consider factors such as inflation and purchasing power parity (PPP). Nominal gross domestic product per capita figures can be influenced by price level changes, making comparisons over time or between countries with different currencies less accurate without adjustment. PPP adjustments help to account for differences in the cost of living and the purchasing power of money across different economies, providing a more realistic comparison of living standards.4
Hypothetical Example
Consider two hypothetical countries, Alpha and Beta, both with a nominal GDP of $500 billion.
-
Country Alpha: Has a population of 50 million people.
- Gross Domestic Product Per Capita (Alpha) = $\frac{$500 \text{ billion}}{50 \text{ million}} = $10,000$
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Country Beta: Has a population of 25 million people.
- Gross Domestic Product Per Capita (Beta) = $\frac{$500 \text{ billion}}{25 \text{ million}} = $20,000$
In this scenario, even though both countries have the same total economic output, Country Beta has twice the gross domestic product per capita of Country Alpha. This suggests that, on average, the citizens of Country Beta have a higher individual share of the country's economic production, potentially indicating a higher average standard of living.
Practical Applications
Gross domestic product per capita is a widely used economic indicator with several practical applications in economics, finance, and policy-making. Governments and international organizations use it to assess the economic development and relative wealth of nations. It often informs decisions regarding foreign aid, trade agreements, and development programs. Economists and financial analysts monitor gross domestic product per capita to identify trends in economic well-being and to forecast future economic conditions. For instance, a sustained increase in gross domestic product per capita might signal strong economic growth and opportunities for investment. Organizations like the World Bank and the OECD regularly publish and track this data for their member countries and global comparisons.3
Limitations and Criticisms
Despite its widespread use, gross domestic product per capita faces several significant limitations and criticisms as a comprehensive measure of well-being or true national prosperity. One major critique is that it is an average and does not account for income inequality within a country. A high gross domestic product per capita could mask significant disparities where a small portion of the population controls the vast majority of wealth, while many live in poverty. As economist12