Per capita income: It hides more than it reveals

Per capita income is a widely used term worldwide. In many cases, it is used more with political implications than economic connotations. This term has been derived from the Latin word 'per caput', meaning per head or per person. It helps us to determine the average individual income and to evaluate the standard of living of the people of different countries. 

For instance, the GDP of both India and the UK is $2.8 trillion, but the population of India is 1.4 billion against only 67 million in the UK. Naturally, the UK stands economically stronger than India.

The procedure of calculating per capita income is very easy, i.e., gross national income divided by population. Any school student can work it out within a few seconds, but the reality is not so simple. Apparently, per capita income has some advantages. It provides an opportunity to find out a positive correlation with key economic indicators. It can be useful to businessmen to frame an investment plan. 

For instance, people having low incomes cannot think of Ferrari or Lamborghini cars. Therefore, investors have to design affordable vehicles for them.

Developing countries may attain strong gains in per capita income, which may be a signal to foreign and domestic entrepreneurs to invest there. During the initial stage of development, they may establish themselves as an effective place and secure a dominant position in the market.

Despite some advantages, per capita income is not flawless because it is based on average statistics that have misleading outcomes. For instance, India, Ghana, and Nigeria have relatively similar per capita income at around $2,000. According to the latest World Bank data, over 50% of the Nigerian population lives in absolute poverty. Inversely, India and Ghana have 21% and 13% of their respective populations in severe poverty. 

The reason is extreme disparity in income and distribution of wealth. Few people at the top are extremely rich, whereas millions at the bottom are ultra-poor.

Per capita income calculates the economic output of the total population, but there is a wide difference in age. Many children, students, unemployed, and aged persons do not contribute anything to economic output, but they are theoretically included in the calculation. Without earning or producing anything, they get a share of income as a windfall gain.

Per capita income doesn't include an individual's savings or wealth. A wealthy person might have a low annual income but draw from savings to maintain a higher standard of living, but per capita calculation will show him as a low-income earner.

Many economists think that the idea of per capita income is never realistic; it is simply a capitalist bluff. It never represents the real condition and standard of life of every individual in a country. The main procedure should be a basic needs approach. Fulfilment of basic needs, i.e., food, clothing, housing, education, and healthcare, should be the only scale to measure the standard of living.

A handful of people are enjoying these more than required, whereas crores of others are not getting even a fraction of the minimum. They humorously say that for many days you have fed us American (capitalist) food. Now it is time to test the taste of the Russian (socialist) menu. Socialism is now extinct, but whatever the level, that was the only system that fulfilled the basic needs of an individual.

As calculated by the Bangladesh Bureau of Statistics, per capita income in Bangladesh was $2,784 in the 2023-24 financial year. Some economists say that this amount is much higher in comparison to earlier years and more than that of South Asian countries. However, this matter is always disputed because the procedure of calculation is never beyond question. This report is not also free from controversy.

Economist Dr Fahmida Khatun thinks that these figures do not provide a true picture of the income of people. As an argument, she said that the number of rich and super-rich people in Bangladesh is increasing rapidly. Similarly, the number of poor people is also increasing. At the same time, inequality in society and the rift between people's incomes are mounting. "This situation is not reflected in official statistics. That is why it is not important to people," she remarked. As a result, it is natural to have a dispute about per capita income that is being shown now. 

For example, she said, "When a forest is cut down and an industry is set up, the output of that factory is added as national income, but the loss of forest is not counted. There are many such issues." That is why she thinks that it is a wrong procedure of statistics.

As per accounting rules, a loan is to be deducted from gross income to arrive at actual income. According to statistics of the central bank, at present, the per capita loan of Bangladesh is $460, i.e., Tk39,000. Experts think that this point must be considered while counting per capita income.

The fallen government claimed that there could be different views on per capita income, but this practice is recognised by the United Nations. It is followed in all countries of the world. 

As per the version of the Bangladesh Bureau of Statistics, national income is calculated by adding remittances to domestic income in a year. According to some economists, this procedure is not practically correct because people residing inside the country have no role in earning remittance. An inflated figure is always shown. They have referred to Venezuela as the worst victim of inflated data. 

Depending on earnings from oil, this country once reached the level of rich countries in terms of GDP and per capita income. But forgetting the discrepancy of income and under false obsession with inflated figures, they were not ready for bad times. As a result, Venezuela is now at the level of poor countries.  

Chinmay Prasun Biswas is a former Commissioner of Taxes.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.