Problems of Using Per Capita Income to Compare Standard of Living over Time

Income per capita refers to the National Income of a country divided by the population of the country in a year. It shows the standard of living a country can afford for its people. However, there are various challenges associated with the use of per capita income as a means to compare standards of living over time.

1) The composition of output may change

Income per capita may not be appropriate method to compare people’s standards of living over time because the composition of the output used to measure national income may change. For example, more defense-related goods may be produced and less spent on social services, more producer goods may be made and less consumer goods, and there may be a surplus of exports over imports representing investment overseas. Standards of living depend on the quantity of consumer goods enjoyed.

2) Over time prices will change

Price fluctuations may affect the effectiveness of using per capita income to compare standards of living over time. The index of retail prices may be used to express the GNP in real terms but there are well known problems in the use of such methods.

3) Does not Take into Account the Problem of Income Distribution

National Income may grow but this says nothing about the distribution of that income. A small group may be much better off. Other groups may have a static standard of living or be worse off.

4) Decline in General Quality of Life

Any increase in GNP per capita may be accompanied by a decline in the general quality of life. Working conditions may have deteriorated. The environment may have suffered from various forms of pollution. These non-monetary aspects are not taken into account in the estimates of the GNP.

5) Does not Reflect True Changes in Standards of Living

Finally the national income increases when people pay for services which they previously carried out themselves. If a housewife takes an office job and pays someone to do her housework, national income will increase to the extent of both persons’ wages. Similarly a reduction in national income would occur if a man painted his house rather than paying a professional painter to do the same. Changes of the above type mean that changes in the GNP per capita will only imperfectly reflect changes in the standard of living.

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