National income, per capita income, gross domestic product, gross national product, etc. are terms one usually comes across during school education. Afterwards, unless you pursue a career as an economist, the words are quickly forgotten. Those inexperienced may even confuse the two terms. While it is true that national income is a part of per capita income, the two are distinct entities.
National Income is the aggregate income of a country in a financial year. Its definition includes concepts like gross domestic product and gross national product. The Per Capita Income is the fractionate of the average income of a place and its number of residents. Besides these, the two have several other distinctions. This article explores the differences between national income and per capita income.
National Income vs Per Capita Income
National income is a nation's aggregate income in a financial year. NI is an absolute concept. National income is affected by factors such as Wages, losses, mixed income, depreciation, rent, dividends, etc. There are two types of national income, monetary national income and real national income. National income gets calculated using the income method, the expenditure method, and the value-added method.
Per Capita Income is the aggregate income of an area and its total population. It is a relative concept. Per Capita Income is affected by factors such as National income and population. There are two types of per capita income, monetary per capita income and real per capita income.
Difference Between National Income and Per Capita Income in Tabular Form
|Parameters of Comparison
|Per Capita Income
|A nation's aggregate income in a year
|Fractionate the aggregate income of an area and its total population
|Factors affecting calculation
|Wages, losses, mixed-income, depreciation, rent, dividends, etc.
|National income and population
|Factors affecting its increase
|Proper use of resources results in its increase
|An increase happens when the national income growth rate is comparatively higher than the population growth rate.
|Measuring a country’s economic performance within a period
|Measuring human development index
|Macroeconomics (study of aggregates)
|Microeconomics (study of individual units)
|PCI = National Income/ Total Population
|Measure economic growth, calculate per capita income, determine contributions of different sectors, asses standard of living, etc.
|Calculate an area’s wealth, determine if a place is affordable, etc.
A nation's aggregate income in a year is called national income. National income has other names like national output, dividends, and expenditure. It consists of the incomes and payments of its citizens and businesses. National income is related to national products.
Modern Definition of National Income
The modern definition of national income consists of two concepts GDP and GNP.
Gross Domestic Product
For more ease, Gross domestic product is referred to by the acronym GDP. It is the average value of goods and services generated in a nation by both citizens and non-citizens. The calculation of GDP takes place quarterly or yearly. GDP gets used globally to measure a nation's economic growth. When calculating the GDP of a country, anything without an exact value in the market gets cut out. GDP calculation considers rent, undistributed profits, direct taxes, depreciation, wages and salaries, interest, mixed income, and dividends.
The formula for calculating gross domestic product is as follows,
GDP= Consumption + investment + government spending + (exports- imports)
Gross National Product
Gross National Product is referred to by the acronym GNP. It is the estimated value of goods and services generated in a nation by its citizens residing within the country and those living abroad. When calculating GNP, the services employed to manufacture goods are excluded. GNP calculation considers gross private domestic services, income from abroad, goods produced or individual services used, and consumer goods and services.
The formula to calculate gross national product is as follows,
GNP= GDP+NR - NP
"GDP" denotes gross domestic product.
"NR" denotes Net income receipts
"NP" stands for Net payment outflow to foreign resources.
Types of National Income
Depending on whether national income gets calculated with current prices or constant prices, there are two types,
Monetary National Income
National income calculated with the current prices is monetary income. It does not represent the real income of a country; hence it cannot determine a country's economic position. When calculating national income using current prices, only the predominate prices of the year get used. When there is an increase in the prices of goods and services, the monetary national income increases, but the actual amount of goods and services has not increased.
Real National Income
National income calculated with constant prices is real national income. This income is the real national income of a country during a year and can be used to determine a country's economic growth. In addition, real national income is an indicator of the citizen's standard of living. The prices of the base year get used for calculating the output valuation. Real national income increases as the goods and services produced in a country increase.
Monetary national income can be converted into real national income using the following formula,
National Income at Constant Price = National Income at Current Price * 100/ Index Number of the Current Year
The Formula of National Income
National income can get calculated using three different methods. The methods are as follows,
- The Expenditure Method: A nation's entire expenditure of the year gets summed to get the national income. The components taken include personal consumption expenditure, government expenditure, foreign investment, and net domestic investment.
- Income Method/ Product Method: The average value of the goods and services produced in a nation gets calculated using the market price. This method considers the income generated by factors of production such as agricultural products, industrial products, minerals, insurance, communication, transport, doctors, lawyers, and teachers.
- Value-added Method: It considers the value added to a manufactured product. This method differentiates the material inputs value and the value of material outputs.
The formula for national income is as follows,
National Income= C+G+I+X+F-D
"C" stands for consumption,
"G" stands for government expenditure,
"I" stands for Investments,
"X" stands for net exports,
"F" stands for national residents' foreign production, and
"D" stands for non-national residents' foreign production.
Significance of Learning National Income
- National Income is an indicator of an economy's status.
- Economists use National Income to develop economic policies for their county's development and growth.
- National Income draws attention to inflammatory gaps and helps to create anti-inflationary and deflationary policies.
- The national budget for a year gets formulated using National Income.
- National Income gets used to measure the variations in the standard of living in a country at varying times.
- National Income helps to find the actual economic development of a country.
- It highlights the contributions of different sectors in a country.
- National income helps to measure and compare the growth of distinct nations.
Uses of National Income
- National Income helps to measure a country's economic growth.
- National Income is needed to calculate per capita income.
- National Income helps to find the contributions of different sectors in a country.
- National Income helps determine the standard of living of the country's citizens.
- National Income provides insight into income inequalities in the population.
- National Income gives information on the level of investment.
- National Income provides insight into the consumption levels of the country's population.
Limitations of National Income
- Human Errors: Since humans are employed when collecting data for national income and during its calculation, mistakes can get made. A person may forget to enter information in all the given forms or enter the wrong information.
- Black Economy: It consists of all work that goes unrecorded and not reported to the authorities. This work is not taxed. Wages from the black economy can interfere with the calculation of the national income.
- Inaccurate representations: Increases in environmental issues like pollution lead people to purchase more items to combat its effects. Further, when the quality of common goods decreases, consumers spend more money to buy high-quality goods. These may reflect an increase in the national income. However, this rise in national income does not mean a rise in the living standards of the nation's people. Hence, national income is not an accurate indicator of the standard of living.
- Failure to measure every workforce: National income only considers services that get paid. This selection means every other unit of work, such as homemakers and do-it-yourself, gets excluded. When these units get excluded, the calculated national income will not be accurate.
- National income does not provide information about the distribution of wealth. Some countries will have a high distinction between the incomes of the rich and poor. This distinction may give an inaccurate representation of the quality of life in the country.
Per Capita Income
"Per Capita" is Latin and means "by head". Per Capita income is the fractionate of the aggregate income of an area and its total population. It is the average aggregate income of a country's population during a specific period. Per Capita Income can measure the income of different population sizes with places of varying sizes, like a country's entire population, a state, a city, or other small areas. Another term used interchangeably with per capita income is "average income". Per Capita Income is an indicator of the quality and standard of living of the residents of a particular area. World Bank uses per capita income to classify undeveloped and developed countries. A significant distinction between national and per capita income is that per capita income considers every individual in the population, men, women, newborns, and kids. Per Capita Income gets used in fields like economics, statistics, and business.
The formula for calculating per capita income is as follows,
Per capita income = National Income/ Total Population.
Types of Per Capita Income
Per Capita Income is classified into Monetary and Real Per Capita Income.
- Monetary Per Capita Income: This income gets calculated using the current prices in an area. Monetary Per Capita Income may increase when there are wage and price increases in the population. A wage increase does not always mean an increase in output; hence, monetary PCI does not provide information about the real income of the area.
- Real Per Capita Income: This income gets calculated using the constant prices. Real PCI provides information about actual products and services in an area. The formula for calculating Real PCI is,
Real Per Capita Income = National Income at Constant Price/Population.
Significance of Per Capita Income
- PCI calculates The Gross Domestic Product (GDP) Per Capita and Gross National Income. The formula for calculating GDP Per Capita is as follows, GDP Per Capita= Gross Domestic Product/Population.
- Per Capita Income provides information about the economic development and economic welfare of an area or country.
- PCI helps calculate a population's average income and its standard of living.
- When the Per Capita Income of a country increases, it means the standard of living of its people has also improved.
What is Per Capita Income Used for?
- To calculate an area's wealth.
- To find out if a place is affordable for living.
- Businesses use the per capita income of a place to decide whether to open their stores there. If an area has a high per capita income, its residents are comfortable spending more.
Limitations of Per Capita Income
- Living Standards: Although per capita income can help in calculating the standard of living, it is not always an accurate description. Per Capita Income does not take into consideration income inequality.
- Inflation: Per Capita Income does not take into consideration events like inflation. When inflation occurs, it halts any increase in income and decreases the purchasing capability of people. By not considering the effects of inflation, the per capita income may describe a population's income with more than the actual amount.
- International Comparisons: The calculation of per capita income does not include the exchange rates between countries. This exclusion means that the information related to the differences in the cost of living in various countries may be incorrect. Additionally, some countries use the bartering system; per capita income cannot account for such non-monetary exchanges.
- Savings and Wealth: The calculation of per capita income does not consider the accumulated wealth of people. Since only income and not savings get used for calculating PCI, the per capita income may erroneously label a wealthy person as a low-income earner.
- Children: A paragraph above mentions that per capita income includes newborns and kids. This inclusion affects the accuracy of per capita income since these units are not income earners. The more children a country has, the more skewed the PCI results will be.
- Economic Welfare: When per capita income gets used to calculate welfare, the results may sometimes be inaccurate. This inaccuracy is because PCI does not consider the quality of work conditions, education levels, health benefits, and work time.
Since per capita income has limitations, it should always be employed jointly with other measures like, the percentage of poor people, regional revenue, and median income.
Main Differences Between National Income and Per Capita Income (in points)
- National income is a nation's aggregate income in a financial year. Per Capita Income is the aggregate income of an area and its total population.
- National income is affected by factors such as Wages, losses, mixed income, depreciation, rent, dividends, etc. Per Capita Income is affected by factors such as National income and population.
- Proper use of resources can help increase the national income of a country. Increases in per capita income happen when the national income growth rate is higher than the population growth rate.
- National income gets used as a measure of a country's economic performance. Per Capita Income measures the human development index.
- The formula for calculating national income is NI= C+G+I+X+F-D. Per Capita Income uses the formula PCI = National Income/ Total Population.
In short, national and per capita incomes are essential determiners of a country's economic state and growth. However, they differ in their use, components used for calculation, calculation formulas, limitations, etc. National income is needed to determine an entire nation's economic level. It can also help find out the contribution of various sectors. Per Capita Income can calculate the income of a country, state, city, or other areas.