Why is per capita income not a reliable indicator of economic development?
Answers
Per capita income = National Income/ Total Population of country.
Per capita income is a better index of economic development than national income/GDP itself.
However, it suffers from certain major limitations as an indicator of welfare and development :
1. Per cap income doesn't show the actual standard of living enjoyed by the common people. Per capita Y does not reflect the level of healthcare, education and such essential infrastructure facilities enjoyed by the people, which are essential benchmarks for development.
NOTE: Economic development is more about the welfare of public than just income.
2. Inequality in distribution of income is not accounted : a country with a few rich and many poor could still have a high per capita income because a millionaire contributes much more to national income than an average earner. In such cases, per cap Y fails to indicate the level of income of the common man.
E.g. in a small country, a majority of people are poor, but some are millionaires. Such a country could still have high per cap Y thanks to millionaires and to the plight of the poor - here per cap Y is actually unrealistic.
3. Age demographics : In a country with a very young or very old population, per cap Y may not be exactly accurate, because neither the children nor the elderly people contribute to national income. But when per Cap Y is measured, they too are included in total population, which decreases the per cap Y.
4. It is possible that even when per capita income is high, per capita consumption of goods and services is low. This can happen especially when the national income is due to production of more heavy defence or industrial goods. And such goods don't really help the common people. And income here, goes to few businessmen and technocrats while common people don't benefit.
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