Concept of per capita income - Meaning, Uses and Limitations

"Delhi Registers India highest per capita income"

National capital Delhi has registered the highest per capita income among all states and union territories of the country, during 2015-16 at about Rs.2,80,000. Delhi's per capita income is over three times the national average. It is followed by Chandigarh and Sikkim with per capita incomes of Rs.2,42,386 and Rs.2,27,465, respectively.

What does per capita income mean?

Income per capita is a measure of the amount of money earned per person in a certain area. It can apply to the average per-person income for a city, region or country, and is used as a means of evaluating the living conditions and quality of life in different areas. It can be calculated for a country by dividing the country's national income by its population.

BREAKING DOWN 'Income Per Capita'

Income per capita counts each man, woman and child, even newborn babies, as a member of the population. This stands in contrast to other common measurements of an area's prosperity, such as household income, which counts all people residing under one roof as a household, and family income, which counts as a family those related by birth, marriage or adoption who live under the same roof.

Uses of Income Per Capita

Perhaps the most common use of income per capita is to ascertain an area's wealth or lack of wealth. The figure is useful in assessing an area's affordability. It can be used in conjunction with data on real estate prices, for instance, to help determine if average homes are out of reach for the average family.

Limitations of Income Per Capita

Because income per capita is the overall income of a population divided by the number of people included in the population, the figure does not always give an accurate representation of the quality of life due to the function's inability to account for skewed data. Specifically, the metric does not account for the effects of income inequality. For instance, if there is an area where 50 people are making $1 million per year and 1,000 people are making $100 per year, the per capita income is $47,714, but that does not give a true picture of the living conditions of the entire population.

For this reason, to obtain an accurate picture of the quality of life in a given area, it is important to consider income per capita in conjunction with other income measurements, such as the median income and the percentage of residents living below the poverty line.

Regards, CA Rahul Gupta

M R T & Associates, Chartered Accountants