Why Is Per Capita Income Important?

Two or more regions can compare income just as two individuals can compare income. The way economists compare regional income is through per capita figures. "Per capita" means per head: It indicates the division of all earned income in a region by the area's population.

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Uses of per capita income include assessing stability and wealth, determining the need for aid, making decisions about investments and market research.

In the broadest sense, per capita income matters because it serves as a measurement of the stability and wealth within an economy. Per capita income is a ratio of the amount of all a region's income divided by its population. Thus, if the ratio rises, it suggests that members of the population are more prosperous than they have been in the past. Conversely, a reduced per capita figure suggests that the standard of living in a region has decreased, assuming the price of goods has either stayed the same or increased with inflation.

Because per capita income is a measurement of prosperity for a region, an advantage of per capita income is it can help you discover regions are in need of financial assistance, assuming that the cost of living is the same in those regions.

For instance, if the cost of rice is a dollar in country Y, but two dollars in country X, and country X's per capita income is higher, members of country X may be just as prosperous as those in country Y. If country X has the same per capita income as county Y, then the higher cost of rice would be an issue. If per capita income is the same, agencies that provide aid or financial assistance to those in country X, because members of country X would be financially worse off.

A higher per capita income represents higher purchasing power, as members of the community have more money to spend. This is useful regarding investment. For instance, in a new business, you would want to approach shareholders who can actually afford to invest. Otherwise, you would waste resources trying to market your company to people who will not back you financially.

Additionally, investing in businesses in areas with higher per capita ratios may yield a higher return, as the income of the area suggests that people have the purchasing power to buy the business's products or services.

Even though there are many good uses of per capita income, it is only useful when there is a relatively low number of very high or very low earners in the community. These outliers could create biased per capita income results that do no represent the area accurately. Additionally, because per capita figures do not tell you how income is distributed, it can mask social issues, which cause the average income in those regions to rise or fall.