Gross national income gni per capita

What Is gross national income gni per capita?

Gross national income (GNI) per capita is an economic indicator that measures the average income earned per person by a country's residents, including income from abroad. It falls under the broader field of national accounts, which are systematic records of the economic activity of a country. GNI per capita provides insight into the standard of living and the overall economic well-being of a nation's population. This metric considers both the income generated from domestic production and the net income received from overseas sources, such as remittances from citizens working abroad or earnings from foreign investments. Gross national income (GNI) per capita is widely used by international organizations to classify and compare economies.

History and Origin

The concept of national income accounting, which underpins gross national income (GNI) per capita, emerged in the early 20th century. The modern framework for measuring national economic output, including what was then known as Gross National Product (GNP), was significantly developed by economist Simon Kuznets for a 1934 U.S. Congress report. For many years, GNP was the primary measure of a country's economic activity. Over time, the nomenclature shifted, with GNP largely being replaced by GNI in international statistical systems to more accurately reflect the concept of income earned by residents. The World Bank, for instance, has long utilized GNI per capita, converted to U.S. dollars using its specialized Atlas method, to categorize countries into income groups for analytical and operational purposes²⁶, ²⁷. The Organisation for Economic Co-operation and Development (OECD) also plays a key role in collecting and disseminating GNI data, working with international standards for national accounts²⁵.

Key Takeaways

• Gross national income (GNI) per capita represents the average income earned by a country's residents, including income from both domestic and foreign sources.
• It is a key economic indicator used by international bodies like the World Bank to classify countries by income levels.
• GNI per capita differs from Gross Domestic Product (GDP) per capita by including net income from abroad, offering a broader view of national income.
• The calculation often involves converting local currencies to a common currency, such as the U.S. dollar, frequently using methods like the World Bank Atlas method.
• While useful for international comparisons and assessing average welfare, GNI per capita has limitations, particularly regarding income inequality and non-market activities.

Formula and Calculation

Gross national income (GNI) per capita is calculated by dividing a country's total GNI by its mid-year population. The GNI itself is derived from Gross Domestic Product (GDP) with adjustments for international flows of income.

The basic formula for GNI is:

Where:

• GDP (Gross Domestic Product): The total monetary or market value of all finished goods and services produced within a country's borders in a specific time period.
• Net Primary Income from Abroad: The difference between income received by residents from abroad (e.g., wages, salaries, property income, investment income) and income paid to non-residents abroad.

Once GNI is determined, GNI per capita is calculated as:

For international comparisons, GNI per capita values, initially in local currencies, are typically converted to a common currency like the U.S. dollar. The World Bank uses its Atlas method for this conversion, which averages the exchange rates for a given year and the two preceding years, adjusted for differences in inflation rates between the country and a reference group of major economies²³, ²⁴.

Interpreting the gross national income gni per capita

Interpreting gross national income (GNI) per capita involves understanding its implications for a country's economic development and the welfare of its citizens. A higher GNI per capita generally suggests a higher average income for residents, which often correlates with improved standard of living, better access to healthcare, education, and infrastructure²². This metric is a fundamental tool in macroeconomics for gauging a nation's prosperity and its capacity for economic growth.

When evaluating GNI per capita, it's important to consider factors like Purchasing Power Parity (PPP). PPP-adjusted GNI per capita provides a more accurate comparison of living standards across different countries by accounting for varying price levels of goods and services²⁰, ²¹. Without PPP adjustment, a higher nominal GNI per capita in a country with a high cost of living might not indicate a genuinely superior standard of living compared to a country with a lower nominal GNI per capita but a significantly lower cost of living. International organizations use GNI per capita to classify countries into various income groups, guiding policies related to development assistance and trade.

Hypothetical Example

Consider two hypothetical countries, Alpha and Beta, both with a population of 10 million people.

Country Alpha:

• Gross Domestic Product (GDP): $500 billion
• Income from Alpha residents working abroad or foreign investments: $30 billion
• Income paid to non-residents for their work or investments in Alpha: $10 billion

First, calculate Alpha's Net Primary Income from Abroad:
$30 billion (received) - $10 billion (paid) = $20 billion

Next, calculate Alpha's GNI:
$500 billion (GDP) + $20 billion (Net Primary Income from Abroad) = $520 billion

Finally, calculate Alpha's GNI per capita:
$520 billion / 10 million people = $52,000 per person

Country Beta:

• Gross Domestic Product (GDP): $550 billion
• Income from Beta residents working abroad or foreign investments: $5 billion
• Income paid to non-residents for their work or investments in Beta: $60 billion

First, calculate Beta's Net Primary Income from Abroad:
$5 billion (received) - $60 billion (paid) = -$55 billion

Next, calculate Beta's GNI:
$550 billion (GDP) + (-$55 billion) = $495 billion

Finally, calculate Beta's GNI per capita:
$495 billion / 10 million people = $49,500 per person

In this example, Country Beta has a higher GDP, indicating more economic activity within its borders. However, due to significant income flowing out of the country to non-residents, its gross national income (GNI) is lower than its GDP. Consequently, Alpha's GNI per capita is higher, suggesting that on average, its residents earn more income than Beta's residents, even though Alpha's domestic production (GDP) is lower. This highlights how GNI per capita provides a different, often more encompassing, perspective on a nation's average income compared to GDP per capita.

Practical Applications

Gross national income (GNI) per capita serves as a crucial metric across various domains, influencing policy, analysis, and investment decisions.

• International Classification: The World Bank relies heavily on GNI per capita to classify countries into income groups (low, lower-middle, upper-middle, and high-income). These classifications are updated annually and are fundamental for determining eligibility for various international aid programs, concessional lending, and other forms of support for developing countries¹⁹.
• Economic Analysis: Economists and policy makers use GNI per capita to assess a country's overall economic health and potential for growth. It provides a benchmark for comparing economic performance across nations and over time. For instance, a rising GNI per capita can indicate improvements in living standards and economic progress.
• Policy Formulation: Governments use GNI per capita, alongside other economic indicators, to formulate national economic strategies. This includes decisions related to fiscal policy, such as tax rates and public spending, and monetary policy, which involves managing the money supply and interest rates.
• Market Research and Business Strategy: Companies engaged in international trade and foreign direct investment consider GNI per capita when evaluating potential markets. A higher GNI per capita might indicate greater consumer purchasing power and a more developed market, influencing decisions on market entry, product pricing, and distribution strategies.

Limitations and Criticisms

While gross national income (GNI) per capita is a widely used and valuable economic indicator, it has several limitations and faces criticisms for not fully capturing a nation's true economic well-being or development.

One primary criticism is that GNI per capita, as an average, does not account for income inequality within a country¹⁷, ¹⁸. A high average income can mask significant disparities where a small portion of the population earns the majority of the income, while many live in poverty. This means a country classified as high-income could still have widespread poverty.

Furthermore, GNI per capita may not adequately reflect non-market activities, such as subsistence farming or unpaid household labor, which are vital components of many economies, particularly in developing countries¹⁵, ¹⁶. The informal economy, which can be substantial in some nations, is also often underrepresented in official GNI calculations¹⁴.

Another limitation stems from the conversion of local currencies to a common currency, typically the U.S. dollar. Despite methods like the World Bank's Atlas method that aim to smooth out fluctuations and account for inflation, exchange rates can still distort comparisons¹³. This is why Purchasing Power Parity (PPP) adjustments are often preferred for more accurate cross-country comparisons of living standards, as they account for differences in the cost of goods and services¹².

Finally, GNI per capita does not incorporate environmental sustainability, the depletion of natural resources, or the overall quality of life factors such as health, education, and social welfare¹⁰, ¹¹. Measures like the Human Development Index (HDI), which combine income with health and education indicators, attempt to provide a more holistic view of development, acknowledging that economic progress goes beyond mere income levels. For a detailed discussion on the limitations, various sources provide further insights into the challenges of using such aggregate indicators.

gross national income gni per capita vs. Gross Domestic Product (GDP) per capita

The distinction between gross national income (GNI) per capita and Gross Domestic Product (GDP) per capita lies in their scope of economic activity. GDP per capita measures the total value of goods and services produced within a country's geographical borders, divided by its population, regardless of who owns the production factors. It focuses on domestic production. In contrast, GNI per capita measures the total income earned by a country's residents and businesses, divided by its population, regardless of where that income is earned. This means GNI per capita includes income from domestic production (like GDP) but also adds income received from abroad and subtracts income paid to non-residents⁸, ⁹.

The primary point of confusion often arises when a country has significant economic activity driven by foreign-owned companies or a large number of its citizens working and earning income abroad. For example, a country with many multinational corporations might have a higher GDP than GNI if a large portion of the profits generated domestically are repatriated by foreign owners. Conversely, a country with many citizens working overseas and sending remittances back home might have a higher GNI than GDP, as these foreign earnings contribute to the national income of residents even if not produced within the country's borders. Thus, GNI per capita provides a more comprehensive picture of the economic well-being of a nation's residents by including all income earned by them, irrespective of geographic origin.

FAQs

What is the main difference between GNI per capita and GDP per capita?

The main difference is that GNI per capita includes net income received from abroad, such as earnings from foreign investments and remittances, whereas GDP per capita only accounts for income generated within a country's geographical borders⁷.

How does the World Bank use GNI per capita?

The World Bank uses GNI per capita to classify countries into different income categories (low, lower-middle, upper-middle, and high-income). This classification helps determine eligibility for various loans, aid, and development programs, particularly for developing countries⁶.

Does GNI per capita reflect the wealth of all individuals in a country?

No, GNI per capita is an average and does not reflect how income is distributed among the population. A high GNI per capita can mask significant income inequality within a country, where a small percentage of people may earn a disproportionately large share of the income⁵.

Why is GNI per capita often preferred over GDP per capita for assessing welfare?

GNI per capita is often considered a better measure of the average standard of living because it captures all income accruing to the residents of a country, regardless of where it was generated. This includes income from foreign sources that directly contributes to residents' purchasing power³, ⁴.

What factors can distort GNI per capita comparisons between countries?

Differences in exchange rates and varying price levels of goods and services can distort GNI per capita comparisons. To mitigate this, economists often use Purchasing Power Parity (PPP) adjustments, which account for the differing purchasing power of currencies across nations¹, ².