Per capita income and international comparisons, Managerial Economics


Per capita income figures can also be used to compare the standards of living of different countries. Thus if the per capita income of one country is higher than that of another country, the living standard in the first country can be said to be higher. Such comparisons are made by aid giving international agencies like the United Nations and they indicate the relevant aid requirements of different countries.

But there are major problems in using real income per head (per capita income) to measure the standard of living in different countries. First there is the whole set of statistical problems and, secondly, there are a number of difficult conceptual problems or problems of interpretation.

i.         Inaccurate estimates of population:  The first statistical problem in calculating income per head particularly in less developed countries is that we do not have very accurate population figures with which to divide total income. 

ii.        Specific items which are difficult to estimate:  Another data problem, as already mentioned, is that data for depreciation and for net factor income from abroad are generally unreliable.  Hence although we should prefer figures for "the' national income, we are likely to fall back on GDP, which is much less meaningful figure for measuring income per head.  Inventory investment and work-in-progress are also difficult items to calculate.

iii.       Non-marketed subsistence output and output of government:  some output like subsistence farming and output of government are not sold in the market.  These are measured by taking the cost of the inputs.  In one country, however, salary of doctors for instance, might be higher and their quality low compared to another country.  Although the medical wage bill will be high, the "real consumption" of medical care in the former might be lower.  Since  "public consumption" is an important element in national income, this could affect comparisons considerably.

Also in making international comparisons it is assumed that the complied national income figures of the countries being compared are equally accurate.  This is not necessarily the case. If, for example, in one country there is a large subsistence sector, a lot of estimates have to be made for self-provided commodities.  The national figures of such a country will, therefore, be less accurate than those of a country whose economy is largely monetary or cash economy.

iv.       Different degrees of income distribution:  If the income of one country is evenly distributed, the per capita income of such a country may be higher than that of another country with a more evenly distributed income, but this does not necessarily mean that most of its people are at a higher living standard.

v.       Different Types of Production:  If one country devotes a large proportion of its resources in producing non-consumer goods e.g. military hardware, its per capita income may be higher than that of another country producing largely consumer goods, but the standard of living of its people will not necessarily be higher.

vi.      Different forms of Published National Income figures: The per capita income figures used in international comparisons are calculated using the published figures of national income and population by each country.  For meaningful comparisons, both sets of national income figures should be in the same form i.e. both in real terms or both in money terms, the latter may give higher per capita income figures due to inflation, and thus give the wrong picture of a higher living standard.  On the other hand, if both sets are in money terms the countries being compared should have the same level of inflation.   In practice, this is not necessarily the case.

vii.      Exchange Rates:  Every country records its national income figures in its own currency.  To make international comparisons, therefore, the national income figures of different countries must have been converted into one uniform currency.   Using the official exchange rates does this. Strictly speaking, these apply to internationally traded commodities, which normally form a small proportion of the national production.  The difficulty is that these values may not be equivalent in terms of the goods they buy in their respective commodities i.e. the purchasing power of the currencies may not be the same as those reflected in the exchange rate.

viii.     Difference in Price Structures:  Differences in the relative prices of different kinds of goods, due to differences in their availability, mean that people can increase their welfare if they are willing to alter their consumption in the direction of cheaper goods.  The people in poor countries probably are not nearly as badly off as national income statistics would suggest, because the basic foodstuffs, which form an important part of their total consumption, are actually priced very low.

ix.      Income in relation to Effort:  The first conceptual problem in calculating income per head is to look at goods and services produced in relation to the human effort that has gone into producing them.  Obviously if people work harder, they will be able to get more goods; but they may prefer the extra leisure.  Indeed, the amount of leisure that people want depends in part on their level of income.  Strictly, therefore, we should take income per unit of labour applied.  It is largely because this would be statistically awkward that economists prefer to take real income per head.

  1. Differences in size:  A problem which is both conceptual and statistical is due to the transport factor.  If two countries are of different sizes, the large country may devote a large proportion of its resources in developing transport and communication facilities to connect the different parts of the country.  This will be reflected in its national income, but the standard of living of its people will not necessarily be higher than that of smaller country, which does not need these facilities to the same extent.
  1. Differences in Taste:  Another formidable difficulty is that tastes are not the same in all countries.  Also in different countries the society and the culture may be completely different thus complicating comparisons of material welfare in two countries.  Expensive tastes are to some extent artificial and their absence in poor countries need not mean a corresponding lack of welfare.  Tastes also differ as regards the emphasis on leisure as against the employment of the fruit of labour: if in some societies people prefer leisure and contemplation, who is to say this reduces their welfare as compared to those involved in the hurly-burly of life and labour in modern industry?
  1. Different climatic zones:  If one country is in a cold climate, it will devote a substantial proportion of its resources to providing warming facilities, e.g. warm clothing and central heating.  These will be reflected in its national income, but this does not necessarily mean that its people are better off than those in a country with a warm climate.
  1. Income per head as index of economic welfare:  We cannot measure material welfare on an arithmetic scale in the same way as we measure real income per head.  For instance, if per capita income increases, material welfare will increase; but we cannot say by how much it has increased, and certainly that it has increased in proportion.
Posted Date: 11/28/2012 6:13:13 AM | Location : United States

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