Why is GDP per capita important

What is GDP per Capita?

In order to understand what GDP per capita is, one must at first understand what GDP is. GDP is the acronym for Gross Domestic Product, which is the total monetary value of all goods as well as services that were produced in the country during one financial year. Gross Domestic Product includes the value of any sort of monetary transactions that were made during the year, and it encompasses everything from consumer count to government expenses. Although the income from the exports of the country is included in the final GDP of the year, the costs associated with imports on the other hand must at first be subtracted.

In other words, Gross Domestic Product can also be referred to as the total revenue money that a nation makes via the levied taxes in any given year. Therefore, it is quite easy to understand that the more a citizen earns, the more taxes he pays to the government, which becomes a part of the nation’s GDP. GDP per capita on the other hand is a number which is calculated to determine the average living standard of the country’s population. The calculation is done by dividing the total annual GDP of the nation by its official annual population to get an average number that roughly represents the average economic standard of the country.

How Is It Important?

The GDP per capita of any nation is considered by economists to be representative of its economy and thought there are other methods of doing the same, it still remains one of the most common systems of making such an estimate. While GDP represents the total income of a nation, it is only after calculating the GDP per capita that we can get an actual picture of the country’s economy, because it represents the share of the individual in the entire nation’s income. It is for this reason that even a seemingly high Gross Domestic Product of a country can mean little if its population is high enough to bring the GDP per capita down. The reasons as to why a country with a considerably high GDP may have a considerably low GDP per capita are mainly two, overpopulation and asymmetrical income.

An example to illustrate the importance of GDP per capita in representing a country’s true .economic standards can be viewed when one compares the GDP and the GDP per capita of two of the world’s most prominent nations, United States of America and China. While the GDP of the US (15,060,000 million USD) was indeed ahead of that of China (6,989,000) in 2011, the difference between the GDP per capita of the two countries (USA – 48,147 USD and China – 5184 USD) was even more astounding due to the huge population difference between the two countries. One should also notice the fact that although the US dominates the chart as far as the total GDP per year is concerned, it falls way behind nations like Luxembourg and Switzerland when it comes to GDP per capita.

Both the GDP and the GDP per capita are representations of a nation’s total economic yield and the actual living standards of its population, however, its utility lies in the fact that it acts as a guidance chart. The economists and the various financial sections of a nation’s government work together to formulate the budget, financial plans, emergency plans, industrial growth plans etc, while keeping various statistical data in front of them and both the GDP as well as the GDP per capita is an important part of the data that they use. It is also believed that the GDP per capita is an important data to monitor in order to keep inflation under control.

Controversies and Confusions

GDP per capita is not beyond criticism or controversy because of a number of reasons and they are as follows:

1. The amount that each country spends on national expenses such as medical facilities and the army, differs from nation to nation and therefore the possible GDP per capita may turn out to be quite different from what the statistics is showing us.
2. It must be understood that GDP per capita is an approach that is just too simplistic to properly estimate the actual living standard of the citizens of the country. The economic inequality present in every country (more in some countries than others) cannot be taken into account while computing the GDP per capita of a nation. What this means is that in every country, there are people who are actually earning a lot less than the GDP per capita suggests. It is the richer section of the society which is mainly responsible for a country’s GDP and they earn thousands of dollars more than what the GDP per capita suggests as well.