Gross national income per capita

What Is Gross National Income Per Capita?

Gross national income (GNI) per capita is a key macroeconomics metric that represents the average income earned per person in a country, including income generated by its residents both domestically and abroad. It offers a comprehensive view of a nation's economic output and the income available to its citizens. GNI per capita is a crucial economic indicator used by international organizations like the World Bank to classify countries by income levels and assess their overall standard of living. It differs from other measures by focusing on the income of residents, regardless of where that income is produced, thereby providing a perspective on the economic well-being of a nation's population.

History and Origin

The conceptual foundations of national income accounting, which underpin gross national income per capita, began to take formal shape in the early 20th century. A significant milestone occurred during the Great Depression when the U.S. government recognized the critical need for comprehensive economic statistics to guide policy decisions. In January 1934, economist Simon Kuznets, then with the National Bureau of Economic Research (NBER), presented a report titled "National Income 1929–32" to the U.S. Senate. This seminal work laid the groundwork for modern national income accounting, providing the first detailed estimates of U.S. national income. ³⁹The Bureau of Economic Analysis (BEA) continues to build upon these high standards for data accuracy and objectivity.
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Initially, "gross national product" (GNP) was a widely used measure, focusing on the output produced by a country's residents. Over time, as global economic interdependencies grew, the focus shifted. The term "gross national income" (GNI) was adopted to align with international standards, particularly the 1993 revision of the System of National Accounts (SNA), to emphasize the income perspective rather than just production. This re-framing better reflects the total income flowing to a country's residents.

Key Takeaways

• Gross national income per capita measures the average income of a country's residents, including income earned abroad.
• It is a widely used metric for classifying countries by income levels and assessing economic development.
• GNI per capita provides insight into the income available to a nation's population, distinguishing it from measures focused solely on domestic production.
• The World Bank uses a special "Atlas method" to convert GNI to U.S. dollars, smoothing out exchange rate fluctuations for better international comparisons.
• While a valuable indicator of economic growth, GNI per capita has limitations in reflecting income inequality or non-market economic activities.

Formula and Calculation

Gross national income per capita is calculated by dividing a country's total Gross National Income (GNI) by its mid-year population. The GNI itself is derived from a country's Gross Domestic Product (GDP) by adjusting for net income received from abroad.

The formula is expressed as:

$\text{GNI per capita} = \frac{\text{GDP} + \text{Net Income from Abroad}}{\text{Mid-Year Population}}$

Where:

• GDP (Gross Domestic Product) is the total monetary value of all final goods and services produced within a country's geographical borders over a specified period.
• Net Income from Abroad refers to the income residents receive from foreign sources (like wages, property income, and profits) minus the income paid to non-residents (income flowing out of the country).
• Mid-Year Population is the total population of the country at the midpoint of the year, used to calculate the average income per person.

For international comparisons, organizations like the World Bank convert GNI into U.S. dollars using their "Atlas method." This method averages the exchange rate for a given year and the two preceding years, adjusted for differences in inflation rates between the country and a group of major currencies, to smooth out short-term fluctuations in exchange rates.
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Interpreting the Gross National Income Per Capita

Interpreting gross national income per capita involves understanding it as an average measure of economic prosperity. A higher GNI per capita generally indicates a more developed economy and a higher average purchasing power parity for its residents. It serves as a broad proxy for the resources available to the average person in a country.

For instance, the World Bank categorizes countries into income groups—low, lower-middle, upper-middle, and high-income—based on their GNI per capita thresholds, which are updated annually to account for inflation. This³⁵ classification helps identify developing nations from developed economies and understand global disparities in wealth. However, it is essential to remember that as an average, gross national income per capita does not reflect the distribution of income within a country. A high GNI per capita could still coexist with significant wealth disparities.

Hypothetical Example

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

Country Alpha:

• GDP: $500 billion
• Net Income from Abroad: $50 billion (e.g., remittances from citizens working overseas, profits from foreign investments by Alpha's companies)

Country Beta:

• GDP: $550 billion
• Net Income from Abroad: -$20 billion (e.g., significant profits repatriated by foreign companies operating in Beta, fewer remittances received)

Calculating GNI for each country:

For Alpha:
( \text{GNI}\text{Alpha} = \text{GDP}\text{Alpha} + \text{Net Income from Abroad}\text{Alpha} )
( \text{GNI}\text{Alpha} = $500 \text{ billion} + $50 \text{ billion} = $550 \text{ billion} )

For Beta:
( \text{GNI}\text{Beta} = \text{GDP}\text{Beta} + \text{Net Income from Abroad}\text{Beta} )
( \text{GNI}\text{Beta} = $550 \text{ billion} + (-$20 \text{ billion}) = $530 \text{ billion} )

Calculating GNI per capita:

For Alpha:
( \text{GNI per capita}_\text{Alpha} = \frac{$550 \text{ billion}}{10 \text{ million}} = $55,000 )

For Beta:
( \text{GNI per capita}_\text{Beta} = \frac{$530 \text{ billion}}{10 \text{ million}} = $53,000 )

Even though Country Beta has a higher GDP, Country Alpha's gross national income per capita is higher due to its positive net income from abroad. This example illustrates how GNI per capita provides a different perspective on national income compared to just GDP, highlighting the importance of cross-border income flows for a nation's residents.

Practical Applications

Gross national income per capita serves as a foundational metric with numerous practical applications in economic analysis and policymaking within the global economy.

• International Comparisons: It is widely used by international bodies like the World Bank to compare the economic development levels and living standards across countries. This³⁴ allows for the categorization of countries, which can influence eligibility for development aid or preferential trade agreements.
• Policy Formulation: Governments and central banks use GNI per capita data to inform economic policy decisions. For instance, understanding the average income level can help in designing social welfare programs, tax policies, and strategies for investment in human capital.
• Market Analysis: Businesses and investors analyze GNI per capita to gauge market potential and consumer purchasing power in different regions. A higher GNI per capita suggests a more affluent consumer base, which can influence foreign direct investment decisions.
• Academic Research: Economists and researchers utilize GNI per capita in studies on economic development, income disparities, and the effectiveness of various economic models. Data on GNI per capita is compiled and disseminated by official statistical agencies and international organizations for broad use.

³³Limitations and Criticisms

While gross national income per capita is a valuable economic indicator, it comes with several limitations and criticisms:

• Average Measure: As an average, GNI per capita masks significant internal income inequality. A country could have a high average GNI per capita but still have a large portion of its population living in poverty. This³² means it doesn't fully capture the distribution of wealth or well-being within a society.
• Non-Market Activities: It typically does not account for non-market economic activities, such as unpaid household work, volunteer services, or informal sector activities. These contributions can be substantial, particularly in developing nations, leading to an underestimation of true economic output and welfare.
• Quality of Life vs. Income: GNI per capita focuses solely on income and does not directly measure quality of life factors such as environmental quality, health outcomes, education levels, or happiness. An increase in GNI per capita might not necessarily translate to a proportional improvement in overall well-being.
• ³⁰, ³¹Exchange Rate Volatility: While the World Bank's Atlas method aims to smooth out currency fluctuations, the conversion of local currencies to U.S. dollars for international comparison can still be affected by significant exchange rate volatility, which might distort real comparisons between countries.
• ²⁸, ²⁹Sustainability: Gross national income per capita, like other traditional economic measures, does not inherently account for the sustainability of economic growth, such as the depletion of natural resources or environmental degradation.

²⁷Gross National Income Per Capita vs. Gross Domestic Product Per Capita

Gross national income (GNI) per capita and Gross Domestic Product (GDP) per capita are both measures of economic activity per person, but they differ significantly in what they measure and, consequently, what they represent. The primary distinction lies in their geographic versus residency focus.

While GDP per capita is crucial for understanding the size and output of a nation's domestic economy, gross national income per capita offers a more precise picture of the actual income accruing to a nation's residents, reflecting the impact of international financial flows and the involvement of citizens in the global economy.

²⁶FAQs

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

The main difference is that Gross National Income (GNI) per capita focuses on the income earned by a country's residents, including income from abroad, while Gross Domestic Product (GDP) per capita measures the value of goods and services produced within a country's borders, regardless of who earns the income.

###²⁵ Why is Gross National Income per capita used by organizations like the World Bank?
The World Bank uses GNI per capita to classify countries into income groups (low, lower-middle, upper-middle, and high income) because it provides a good measure of the average income available to a country's residents and their overall standard of living. This²⁴ helps in assessing economic development and guiding policies for developing nations.

Does Gross National Income per capita account for income inequality?

No, Gross National Income per capita is an average measure and does not account for income distribution or income inequality within a country. A high GNI per capita can exist alongside significant disparities in wealth among the population.

###²³ How does the "Atlas method" affect GNI per capita calculations?
The "Atlas method" is a specific conversion factor used by the World Bank to convert GNI from local currencies to U.S. dollars. It averages the exchange rate over three years and adjusts for differences in inflation between the country and major economies. This method helps to smooth out temporary fluctuations in exchange rates, making international comparisons of GNI per capita more stable and reliable.

###²² What are the limitations of using GNI per capita as a sole measure of a country's well-being?
While useful, GNI per capita doesn't capture non-market activities, environmental quality, or factors like happiness and social welfare. It's a purely economic measure of income, and a high GNI per capita doesn't automatically mean a high quality of life or equitable distribution of wealth for all citizens.

[^1²¹^](https://www.imf.org/external/pubs/ft/fandd/2017/03/pdf/coyle.pdf)[²](https://www.destatis.de/EN/Themes/Countries-Regions/International-Statistics/Glossary/GrossNationalIncomePerCapita_c.html)[³](https://ourworldindata.org/world-bank-income-groups-explained)[⁴](https://ourworldindata.org/world-bank-income-groups-explained)[⁵](https://ourworldindata.org/grapher/gni-per-capita-vs-gdp-per-capita)[⁶](https://ourworldindata.org/grapher/gni-per-capita-vs-gdp-per-capita)[⁷](https://www.imf.org/external/pubs/ft/fandd/2017/03/coyle.htm)[⁸](https://www.destatis.de/EN/Themes/Countries-Regions/International-Statistics/Glossary/GrossNationalIncomePerCapita_c.html), ⁹¹⁰¹¹, ^121314151617, ¹⁸¹⁹²⁰