What is average income or per capita income why do we use average what are the limitation of per capita?
Answers
Due to limitations of national income as an indicator of development, economists like Rostow, Baran and Leibenstein etc. favored the use of per capita income as an index of development.
The UN experts in their report an, “Measures of Economic Development of Underdeveloped Countries” have also accepted this criterion. Broadly speaking per capita income refers to the real national income divided by the total population of the country.
Per Capita Income
If the rate of population surpasses the rate of national income growth, then per capita national income will fall. Similarly if both national product and population grow at the same rate, per capita national product will remain constant. This is not economic development.
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Therefore it is not rise in real national income but rise in real per capita income which may be taken as an indicator of development. Hence there is the urgent needs to check the growth rate of population and to accelerate the rate of national growth, particularly in underdeveloped countries so that the real per capita income will rise.
We use averages because they are useful for comparing differing quantities of the same category.
For example, to compute the per capita income of a country, averages have to be used because there are differences in the incomes of diverse people.
The limitation of this criterion are:
Per capita income is useful for comparison but it doesn't show the distribution of income.
It also ignores other factors such as infant mortality rate, literacy level, healthcare, etc.
Per capita income does not give the true picture as there is a huge population which does not earn at all like children and the senior citizens but they are also included while calculating per capita income. National income rises but its distribution make the rich richer and the poor poorer.