Per Capita Income Definition, Functions, Components, & Examples

BANKING & FINANCE, ACTIVELYSHARE.COM — Per capita income is one of the most important indicators of welfare.

Each country uses certain economic instruments to measure its level of productivity and welfare, income per capita is one of them. In an economic context, per capita income is the real amount of money earned by individuals in a country and reflects how their economic activities are on a micro scale.

On an international scale, per capita income is one of the indicators to determine the class of a country, whether it is a developed country, upper middle class, lower middle class, or underdeveloped country.

Meanwhile, on a national scale, the government can use per capita income data in various conditions. You can read more about what per capita income is, its functions, examples, and how to calculate it below.

What is Per Capita Income?

Per capita income is an indicator or benchmark in measuring the level of community welfare in a country. So, per capita income is the total income of the country divided by the total population so that the average income of the population is known.

The higher the value of a country’s per capita income, it means that the society is more prosperous. For example, Indonesia’s per capita income is still relatively low when compared to neighboring countries such as Malaysia and Singapore.

Per Capita Income Function

There are several functions of per capita income for a country. See the explanation of the function of per capita income below.

  1. Knowing the Level of Prosperity of the Country & Its Society
    As already explained that per capita income will show the results of the average income of a country’s people. Thus, the function of per capita income is to know the level of prosperity of the country and its people. Because per capita income involves calculating people’s income.
  2. Measuring the Smooth Implementation of State Economic Activities
    Next, the function of per capita income is to measure the smooth implementation of a country’s economic activities. This is because the income of a country cannot be separated from various economic activities. The existence of per capita income makes the country able to assess the results of economic activities that have been carried out.
  3. Reflecting the Economic Situation of the Community & State at a Certain Time
    A country definitely needs information related to the results of its activities and economic conditions. So that the function of per capita income is to reflect the economic situation of the community and the state at a certain time. Because per capita income contains economic data to be analyzed in order to evaluate. Thus, the state is able to recognize the country’s strengths and weaknesses.
  4. Basis for Policy Making in the Future
    One of the functions of per capita income is as a basis for policy making in the future. Because per capita income reflects the condition of the prosperity of the population. These results can be used by the government as consideration in making a decision. So that the state is able to implement policies according to conditions so that they are able to achieve economic goals.

Components of Per capita Income

The calculation of per capita income involves several important components. The components of per capita income are as follows.

  1. National Income
    First, the component of per capita income is national income. The meaning of national income is the amount of state income in a period of one year. National income has an influence on per capita income. The value of per capita income and national income are comparable. The higher the national income, the higher the per capita income. On the other hand, if national income decreases, the level of per capita income will be low.
  2. Total Population
    The total population is the total population that occupies a country. The level of comparison of per capita income and total population versus inverse. If the total population of a country is high, then its per capita income is lower. Similarly, if the amount of income is small, then the per capita income is also high.

Group of Countries Based on Per capita Income

A country’s economic condition can be known by analyzing per capita income. Therefore, there are several groups of countries for this calculation. Below are the groups of countries based on per capita income, among others:

  1. High-Income Countries
    The first group of countries is high-income countries. A country is said to be high-income if its per capita income is worth more than USD. 8,335. Usually this group comes from developed countries in the world. Examples of high per capita income are Singapore, Japan, the United States, and so on.
  2. Upper Middle Income Countries
    While the upper middle income group based on per capita income are countries with an average income between $ 4,046 to $ 8,335. Examples of this per capita income come from countries in Europe, such as Belgium, Canada, France.
  3. Lower Middle-Income Countries
    Furthermore, the group of countries based on per capita income is lower-middle-income countries. Usually the per capita income of this country is between $675 to $4,046 only. Indonesia’s per capita income falls into this category at $3,870.
  4. Low-Income Countries
    Finally, the group of countries based on per capita income is low-income countries. The median income is less than $675. Examples of low per capita incomes can be found in countries in Africa and conflict areas, such as Nigeria, Somalia, Uganda, Ethiopia, Afghanistan, and many others.

How to Calculate Per capita Income and the Formula

After knowing what per capita income is and its explanation, then ActivelyShare.com will discuss how to calculate per capita income. There are two per capita income formulas used in the calculation. Get to know how to calculate per capita income and the formula below.

1. Nominal Per capita Income Formula

First, how to calculate per capita income is to use a nominal formula. In this case, the calculation is based on the current price. So the formula for nominal per capita income is:

Per capita Income = Gross National Product Price Applicable: Total Population

Calculation Example:

In 2018, country A had a GNI of 2700 trillion, with a total population of 150 million people, then the per capita income of country A in that year was :Per capita income of country A = 2700 trillion/100 million = 27 millions, the per capita income of country A in 2018 is 27 million/person/year.

2. Real Per capita Income Formula

Meanwhile, the method of calculating real per capita income is the calculation process using constant prices. Constant prices are obtained from the value of per capita income in a certain reference year. So the formula for real per capita income is as follows:

Per Capita Income = Gross National Product Constant Price : Total Population

Example of Calculation:

In 2018, country A has a population of 150 million people, with the highest reference to the calculation of GNI being 2015 GNI, which is 3500 trillion, then the per capita income of country A in that year is: Per capita income of country A = 3500 trillion/100 million = 35 million

Thus, the per capita income of country A in 2018 was 35 million/person/year, with reference to 2015 GNI.

That’s the discussion from ActivelyShare.com about what per capita income is, its functions, components, country groups, as well as how to calculate per capita income and the formula! Per capita income is a reflection of the welfare of the country from the household level to the government, so efforts to increase it must be done together.


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