What Is Per Capita Income? Meaning, Formula & Examples

Per capita income means the average income earned by each person in a particular area. We calculate it by dividing the total income of the area by its total population.

Let’s say a small town has 5,000 people and a total income of ₹10 crore. To find the per capita income, we divide ₹10 crore by 5,000.

Calculation Table:
 

This means that, on average, each person in the town earns ₹20,000.

Now consider a family in the town: Raj, Meena, and their two children. If the total income in their house is ₹80,000, and they divide it by 4 (for each family member), their per capita income is also ₹20,000, just like the town average.

Per capita income helps compare living standards between places or over time.

Beyond the figures, per capita income provides a straightforward way to compare living standards and understand overall well-being.

Understanding Per Capita Income 

Per capita income means the average income each person earns in a given area. It includes everyone in the population, adults, children, and even newborns.

This is different from other income measures like:

• Household Income: It is the total income of all individuals living together under one roof, regardless of their relationship to each other.
   
• Family Income: It only includes people related by blood, marriage, or adoption who live together.

These differences make per capita income a unique way to understand income distribution.

Example 1: Per Capita Income

A village has 1,000 people and earns ₹2 crore in total.
Per capita income = ₹2 crore ÷ 1,000 = ₹20,000 per person.
Even babies are counted, though they don’t earn anything.

Example 2: Household Income

If a family of five earns ₹1,00,000 together, their household income is ₹1,00,000, not ₹20,000 per person.

So, per capita income gives a broad view of income, but it may not show how income is shared within families or homes.

Why Is Per Capita Income Important?

Per capita income helps us understand how wealthy or poor an area is. It gives an average income per person, which helps in comparing different towns, cities, or countries.

For example, if the average home price in Town A is ₹40,00,000 and the per capita income is ₹2,00,000, the affordability ratio is:

₹40,00,000 ÷ ₹2,00,000 = 20

In Town B, if the average home price is ₹30,00,000 and the per capita income is ₹2,50,000, the ratio is:

₹30,00,000 ÷ ₹2,50,000 = 12

A lower ratio means homes are more affordable. So, even if Town A looks richer, Town B is more affordable for its people.

Uses of Per Capita Income:

1. To Measure Wealth
   Government bodies use per capita income to rank areas by wealth.
    
2. To Check Affordability
   It helps us see if people in an area can afford things like houses, cars, or services.
    
3. To Help Businesses Decide
   Companies use per capita income to decide where to open shops or offices. 

The table below shows how per capita income and home prices affect affordability in different towns.
 

So, per capita income is not just a number; it helps governments, families, and businesses make smart choices.

Limitations of Per Capita Income

Per capita income is a useful tool, but it has clear limits. It shows the average income per person but does not reveal how money is shared across the population. Do not confuse per capita income with median income, because most people usually earn much less than the average in such cases.

1. It Ignores Income Inequality

Per capita income divides total income by the number of people. But it doesn’t show if a few people earn much more than others. This can hide the true picture of how people live.

Example:

Let’s say a town has:

• 50 rich people earning ₹40,00,000 each per year
   
• 1,000 others earning ₹2,00,000 each per year

Total Income = (₹40,00,000 × 50) + (₹2,00,000 × 1,000) = ₹20 crore + ₹20 crore = ₹40 crore
Total Population = 1,050 people
Per Capita Income = ₹40 crore ÷ 1,050 = ₹3,80,952

The example below shows how a small rich group can raise the average income, even when most people earn much less.
 

So, the town’s per capita income is ₹3,80,952. But this does not mean everyone lives well. Most people earn only ₹2,00,000 per year. Yet, because of the few very rich people, the average looks high.

2. It Can Misguide Government Aid

If the government uses per capita income to decide where to send help (like housing or food aid).

The Hidden Effect of Inflation on Per Capita Income

Per capita income tells us how much, on average, each person earns. But it does not show how much that money can buy over time. 

Why Inflation Matters?

Even if people earn more money this year, they may not be better off if everything costs more. This is where inflation reduces the real value of income.

It is not enough to only look at rising incomes, because what truly matters is how much people can buy with that money. This is called real income, which means income adjusted for inflation. Even if people earn more this year, they may not be better off if prices rise faster, because inflation reduces the real value of income.

Let’s say:

• Last year, per capita income was ₹4,00,000
   
• This year, it increased to ₹4,40,000
   
• That’s a 10% rise in income
   
• But inflation this year is 4%

So, real income growth = 10% – 4% = 6%.This means people can only buy 6% more, not 10% more, because prices have also gone up.

GDP vs Per Capita Income: What’s the Difference?

Gross Domestic Product (GDP) shows the total value of all goods and services a country produces in a year. It includes what people spend, what the government spends, investments, and exports minus imports.

Per capita income tells us how much income each person earns on average in a country. We calculate it by dividing the country’s total income by its total population.

Key Difference
 

• GDP shows the overall size of a country’s economy.
   
• Per capita income shows how rich or poor the average person is.

A country may have a large GDP but low per capita income if it has a very large population.

India’s Economic Growth vs. Individual Prosperity

India has become the fifth-largest economy in the world in terms of total GDP. However, this rise in overall economic size has not yet improved the average income per person, also known as per capita income. A recent report by Llama Research says that for India’s growth to be meaningful, it must now improve how much each person earns.

Why Does This Gap Matter?

Although the economy is growing, many individuals are not feeling the benefits. This is because:

• A large population divides the total income.
   
• Growth is concentrated in a few sectors or regions.
   
• Income inequality is still high.

Conclusion

Per capita income shows the average income each person earns in a country, town, or any given area. We calculate it by dividing the total income of the area by the total number of people living there. This measure helps us compare how wealthy or poor different places are and gives an idea of living standards. However, it only shows the average and does not explain how income is shared. In many cases, most people may earn far less than the average.

FAQ’s
 

1. Does per capita income count children and non-workers?
Yes, it includes everyone in the population, adults, children, and even newborns, whether they earn money or not.

2. Can two towns with the same per capita income feel different?
Yes, because living costs may vary. A town with lower prices can feel richer even if the income figures match.

3. How can a few rich people affect per capita income?
A small, wealthy group can raise the average, making it look like people are richer than they are.

4. Why do businesses check per capita income?
Companies use it to guess spending power. A higher figure often means people can buy more goods and services.

5. Is per capita income always a fair measure of well-being?
Not always. It ignores inequality, inflation, and local prices, so it cannot fully show how people live day to day.

 

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