Per Capita Income

What Is Per Capita Income?

Per capita income is a measure of the amount of money earned per person in a nation or geographic region. Per capita income can be used to determine the average per-person income for an area and to evaluate the standard of living and quality of life of the population. Per capita income for a nation is calculated by dividing the country's national income by its population.

Understanding Per Capita Income

Per capita income counts each man, woman, and child, even newborn babies, as a member of the population. This stands in contrast to other common measurements of an area's prosperity, such as household income, which counts all people residing under one roof as a household, and family income, which counts as a family those related by birth, marriage, or adoption who live under the same roof.

Per Capita Income in the U.S.

The United States Census Bureau takes a survey of income per capita every ten years and revises its estimates every September. The Census takes the total income for the previous year for everyone 15 years and older and calculates the median average of the data. The census includes earned income (including wages, salaries, self-employment income), interest income, dividends as well as income from estates and trusts, and government transfers (Social Security, public assistance, welfare, survivor and disability benefits). Not included are employer-paid healthcare, money borrowed, insurance payments, gifts, food stamps, public housing, capital gains, medical care, or tax refunds. 

According to 2018 Census data, the national per capita income for the year was $32,621 in 2018 dollars as shown in the table below. We can see, from the U.S. Census Bureau, that the per capita income is lower than the median household income of $60,293, which is calculated by grouping the number of people in each household.

Per Capita Income U.S.  Investopedia

Each metric has its advantages. Per capita income is helpful when analyzing a large number of people, such as the population of the United States, which stands at more than 300 million. However, median household income is helpful when determining the income of families in the U.S. and in particular, how many families are in poverty.

Uses of Per Capita Income

Perhaps the most common use of income per capita is to ascertain an area's wealth or lack of wealth. For example, income per capita is one metric the U.S. Bureau of Economic Analysis (BEA) uses to rank the wealthiest counties in the United States, the other being median household income.

Per capita income is also useful in assessing an area's affordability. It can be used in conjunction with data on real estate prices, for instance, to help determine if average homes are out of reach for the average family. Notoriously expensive areas such as Manhattan and San Francisco maintain extremely high ratios of average home price to income per capita.

Businesses can also use per capita income when considered opening a store in a town or region. If a town's population has a high per capita income, the company might have a better chance at generating revenue from selling their goods since the people would have more spending money versus a town with a low per capita income.

Limitations of Per Capita Income

Although per capita income is a popular metric, it does have some limitations.

Livings Standards

Since per capita income uses the overall income of a population and divides it by the total number of people, it doesn't always provide an accurate representation of the standard of living. In other words, the data can be skewed, whereby it doesn't account for income inequality.

For example, let's say a town has a total population of 50 people who are earning $500,000 per year, and 1,000 people earning $25,000 per year. We calculate the per capita income as ($500,000 * 50) + (1,000 * $25,000) to arrive at $50,000,000 in total income. When we divide $50,000,000 / 1,050 (total population), the per capita income is $47,619 for the town.

However, the per capita income doesn't give us a true picture of the living conditions for all of those living in the town. Imagine if federal aid or public assistance was provided to towns based on per capita income. The town, in our example, might not receive the necessary aid such as housing and food assistance if the income threshold for aid was $47,000 or less.

Inflation

Per capita income doesn't reflect inflation in an economy, which is the rate at which prices rise over time. For example, if the per capita income for a nation rose from $50,000 per year to $55,000 the next year, it would register as a 10% increase in annual income for the population. However, if inflation for the same period was 4%, income would only be up by 6% in real terms. Inflation erodes the purchasing power of the consumer and limits any increases in income. As a result, per capita income can overstate income for a population.

International Comparisons

The cost of living differences can be inaccurate when making international comparisons since exchange rates are not included in the calculation. Critics of per capita income suggest that adjusting for purchasing power parity (PPP) is more accurate, whereby PPP helps to nullify the exchange rate difference between countries. Also, other economies use bartering and other non-monetary activity, which is not considered in calculating per capita income.

Savings and Wealth

Per capita income doesn't include an individuals savings or wealth. For example, a wealthy person might have a low annual income from not working but draws from savings to maintain a high-quality standard of living. The per capita metric would reflect the wealthy person as a low-income earner.

Children

Per capita includes children in the total population, but children don't earn any income. Countries with many children would have a skewed result since they would have more people dividing up the income versus countries with fewer children.

Economic Welfare

The welfare of the people isn't necessarily captured with per capita income. For example, the quality of work conditions, the number of hours worked, education level, and health benefits are not included in per capita income calculations. As a result, the overall welfare of the community may not be accurately reflected.

It's important to consider that per capita income is only one metric and should be used in conjunction with other income measurements, such as the median income, income by regions, and the percentage of residents living in poverty.