How is Per Capita Income Calculated?

Per Capita is a statistical concept. The term ‘Per Capita’ means ‘Per Person’. Per Capita Income or PCI is the average income that an individual earns in a given area or country in a year. It is usually measured to assess the average earning of a population to compare it with other populations. It is used in different contexts to assist in comparison and get a birds’ eye view of the population.

For example, imagine there are 10 people in a room. Each one of them is a salaried employee with a large MNC. However, they have different areas of specialization and draw different salaries. Let’s say that the salaries drawn are as follows:

1. Rs.1 lakh
2. Rs.1.2 lakh
3. Rs.2 lakh
4. Rs.80,000
5. Rs.1.2 lakh
6. Rs.2 lakh
7. Rs.1 lakh
8. Rs.1.8 lakh
9. Rs.1.5 lakh
10. Rs.1.5 lakh

As you can see, the salaries are varied. To get a better idea of the income of the group looking at the Per Capita Income can be a good idea. The PCI of this group is Rs.1.4 lakh. If we extend this sample to the entire country, then understanding the Per Capita Income can give you an idea of the average income of an individual living in the country.

How to calculate per capita income?

There are two main parts of the formula to calculate per capita income – the total income earned by the population and the size of the population. The formula is as follows:

Per Capita Income = Total income of the population/Size of the population

Hence, in the example cited above,

• Total income of the population = Rs.14 lakh (1 + 1.2 + 2 + 0.8 + 1.2 + 2 + 1 + 1.8 + 1.5 + 1.5)
• Size of the population = 10

Therefore,

Per Capita Income = 14 lakh/10 = Rs.1.4 lakh

Let’s change the example a little. Let’s say that there are 14 people in the room but the additional four are jobless. Therefore, we have

• Total income of the population = Rs.14 lakh (1 + 1.2 + 2 + 0.8 + 1.2 + 2 + 1 + 1.8 + 1.5 + 1.5 + 0 + 0 + 0 + 0)
• Size of the population = 14

Therefore,

Per Capita Income = 14 lakh/14 = Rs.1 lakh

In a country, there will be people who are unemployed. While calculating the PCI, it is important to take every individual in the population into consideration.

The importance and use of per capita income

PCI is used by governments to highlight the average income of people in the country. It helps them create policies make efficient socio-economic decisions. It can also be used by businesses to assess the average income of the region they plan to operate in and price their products and services accordingly. PCI, along with a few other economic factors can help assess the buying power of people in a region with ease.

Summing Up

In simple terms, per capita income is the average income earned by an individual in a specific area. This is not an indicator of the overall wealth of individuals but only the average earning in a year. The formula to calculate PCI is simple where you divide the total income of a population by the size of the population. It is one of the most commonly used statistical measures to estimate the approximate standard of living of the population.