What Is GDP Per Capita?
GDP Per Capita is a measurement of the approximate value of a country’s gross domestic product (GDP) contributed by each member of its population. It is calculated by taking a country’s GDP and dividing it by the country’s population. GDP refers to the total value of all goods and services produced within a country’s borders during a period of time, usually annually. “Purchasing power parity,” or the cost to procure a basket of similar goods, must be used while comparing GDP per capita between countries.
What Does GDP Per Capita Tell You About an Economy?
A high GDP per capita usually correlates with a high standard of living, although GDP per capita is highly sensitive to variations in population size. For example, back in 2019, Luxembourg had a total GDP of $64.45 billion, ranking 69th highest in the world. However, given that its population is only about 600,000, its GDP per capita is over $113,000; the highest of any country worldwide. In contrast, China had a total GDP of $27.31 trillion and a GDP per capita of only $19,098 because it has the world’s highest population of more than a billion people within its borders. A majority of the countries ranked among the top ten for GDP per capita by the International Monetary Fund are highly-developed economies of small size and low population. High GDP per capita is also a characteristic of technologically-advanced societies because the use of technology enables such economies to boost productivity and produce more goods with fewer workers.
What Factors Contribute to a High GDP Per Capita?
The overall figure for GDP per capita is affected by several factors. Some of them are similar to the ones for GDP. Others, such as population, are unique to GDP per capita. Here are some factors that affect GDP per capita. Population Growth: Because population is the denominator in the calculation of GDP per capita, it follows that a high number for this measure can significantly alter the final figure for GDP per capita. If a nation’s population growth outpaces its economic growth, the GDP per capita will be negative, even if the nation’s economic growth is positive. This phenomenon may occur in developing countries; even as the country’s economy grows, the population growth may outpace it, resulting in a lowered standard of living. This is the reason why the United States is considered a prosperous country. Even though it has a relatively high population figure, its GDP is enough to ensure that it ranks among countries with the highest GDPs. Economic Geography: While a country’s location is important to forge trade links, it can also be an important determinant of productivity. The effect of economic geography on its GDP is different. For example, the presence of neighbors that are engaged in a similar industry can reduce supply chain for the final product, induce more competition between producers, and enable cheaper returns and more efficient use of its resources. The establishment of trading links between countries that are situated nearby also decreases transportation costs while providing access to large markets. Regional trade treaties, such as those between member countries of the European Union or ASEAN, are examples of such economic arrangements in the same geography. Transparency: Research has found that democracies and transparent judicial systems are associated with higher GDP per capita. This is because corruption in such systems is less, reducing the overall costs of starting a business and more citizen trust in their economic systems. Level of Education: The education level of a country’s citizens also influences its GDP per capita. Countries whose citizens have postsecondary education tend to have a higher per capita GDP. Citizens who had education levels beyond high school have contributed as much as sixty percent of overall GDP growth in France, Norway, Switzerland and UK.
Is Per Capita GDP a Useful Indicator?
Per capita GDP is an indicator of the standard of living for a country’s citizens. It takes the country’s productivity, i.e., it’s GDP, and investigates its effects and useful to citizens. For some, that may be a more accurate and useful measure as compared to say, just, GDP. A country can have high productivity figures and still be poor because of inefficiencies in distributing monetary gains from those figures. An example is the former Soviet Union which had high GDP figures, comparable or more than those for capitalist economies. But it had a low per capita GDP, one that was below the world average during its final years of existence, and large sections of its population lived in poverty. In that respect, per capita GDP is an improvement over standard GDP as a measurement tool for the effectiveness of a country’s economic policies. But it has its own set of drawbacks, the primary one being the use of standard GDP definitions for calculations. Technological advancements, increased automation, and climate change are just some of the factors that a traditional definition of GDP fails to take into account. The non-inclusion of these activities can affect overall figures. For example, automation can increase overall GDP but result in declining levels of employment. If these unemployed individuals or organizations do not make their way back to becoming productive members of an economy, then the country’s per capita GDP declines. GDP calculations also do not take into account various activities that contribute to a nation’s overall productivity. Examples of some of these activities are entertainment and travel. Another criticism of per capita GDP is that it is not an accurate measure of income inequality. According to official figures, US household living standards have stagnated since the 1970s but the country’s GDP per capita has risen during the same time period.
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About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.