For example . "per capita income of country A is 990 US $ “what do you mean by this statement? Explain.
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Answer:
This week, the Government released a slew of statistics. The government expects GDP growth in 2012-13 to be higher than 7.2%, but not close to potential 8.6%. Per capita income crosses Rs 50,000 for first time in 2010-11. As a layman, what should you make of these numbers?
Let’s start with the GDP
GDP or Gross Domestic Product is the value of economic output of a country. For beginners, here’s a simple example. Take a family of 6 brothers, A, B, C, D, E and F. Here’s what each of them does for a living:
A: Furniture maker. His full year sale is Rs 5 lakh
B: Makes and sells steel utensils. His full year sale is Rs 3 lakh
C: Operates a tiffin service. His full year sale is Rs 2 lakh
D: Manufactures steel sheets. His full year sale is Rs 1 lakh. Out of this Rs 1 lakh, he has sold steel sheets for Rs 25000 to B.
E: Produces and sells rice. His full year sale is Rs 50,000. Out of this Rs 50.000 he has sold rice for Rs 20000 to C.
F: A teacher who earns Rs 1 lakh per year.
(Sale value in all these cases includes cost of raw materials, labour plus owner’s profits.)
Let’s calculate their total GDP.
Step 1: Calculate total sales. This works out to Rs 12.5 lakh.
Step 2: Calculate overlapping sales, called intermediate consumption, that is, sale of one person that becomes raw material for another person. This works out to Rs 45,000.
Step 3: Reduce the total sales by intermediate consumption to eliminate double counting (for instance, the sale value of B includes the cost of steel sheets purchased from D). This works out to Rs 12.05 lakh.
The GDP for this family of 6 brothers is Rs 12.05 lakh. Now instead of 6 brothers, when this exercise is done for the entire country, we arrive at the GDP of a country.
The rate of growth of GDP reflects the pace of the economy. For instance, a slowdown in the US economy has led to the GDP of the US growing at a snail’s pace of 1-2% in the last several years, sometimes slipping into the negative territory. By contrast, India clocked a GDP growth of 7-8% in the past few years. And the Govt is projecting it will clock 7.2% in 2012-13.
While 7.2% sounds great, especially in this weak global environment, especially when compared to 1-2% growth rates elsewhere, it really does not translate into too much for India’s standard of living. Not at least in the near future. And this is where GDP per capita and Gross National Income (GNI) per capita comes into play.
GDP per capita and Income per capita
GDP per capita is nothing but GDP per person; the country’s GDP divided by the total population. In our example, it would be Rs 12.05 lakh divided by the total number of people including the workers who work at each of the 6 brothers’ factories. Because the GDP is divided by the total number of workers, the GDP per capita very closely reflects the ‘average’ revenue per person in the economy. As GDP grows it is assumed that everyone in the chain will benefit and the growth will have a trickledown effect on the population, thus improving standard of living. If you earn more, you are able to pay more for your domestic help, thus improving their standard of living. Of course, the growth must be more than inflation.
I must go over a few more explanations before I get to the key point. So do bear with me. Gross National Income, GNI, is slightly different from the GDP. While the GDP measures only the production and services within a country, GNI also includes net income earned from other countries. Per capital GNI or per capita income is the GNI divided by the population.
Now, according to the Government, India’s per capita income has crossed Rs 50,000 for the first time in 2010-2011. It is at Rs 53,000 or around USD 1,000. This is at current prices or market prices. The same works out to USD 790 at constant prices, that is, after factoring inflation.
Statistics mean nothing in absolute terms. So let’s get to some serious global comparison. According to this HSBC report, in 2010, here is how these countries ranked in terms of GDP:
#1 US
#3 China
#8 India
In the same year, this is how per per capita incomes looked:
US: $36,354
China: $2,396
India: $790