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What is 'Income Per Capita'

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.

Per Capita Income in the U.S.

The United States Census Bureau takes a survey of income per capita every 10 years and revises its estimates every September. To calculate it, the Census takes the total income for the previous year for everyone 15 years and older. Then, it provides the median average of the data. The census includes earned income (including wages, salaries, self-employment income), interest income, dividends as well as income from estates and trusts, and government transfers (Social Security, public assistance, welfare, survivor and disability benefits). Not included are employer-paid healthcare, money borrowed, insurance payments, gifts, food stamps, public housing, capital gains, medical care or tax refunds. 

According to 2016 Census data, the national per capita income for the year was $29,829 in 2016 dollars. 

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. For example, income per capita is one metric the U.S. Bureau of Economic Analysis (BEA) uses to rank the wealthiest counties in the United States, the other being median household income.

The figure is also 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. Notoriously expensive areas such as Manhattan and San Francisco maintain extremely high ratios of average home price to income per capita.

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.

Criticisms of Per Capita Income

According to critics, there are several reasons why using per capita income as a measure of prosperity does not make sense. First, per capita income comparisons need to factor inflation into the equation. Without doing this, economic growth is overstated and can be exaggerated. Second, cost of living differences can be inaccurate when making international comparisons when they are not reflected by exchange rates. Critics say in these cases, adjusting for purchasing power parity (PPP) will be more accurate. Third, certain economies give importance to bartering and other nonmonetary activity, which is not considered in calculating per capita income. And finally, per capita income does not consider investments that may lead to the overall improvement of a person’s well-being, including healthcare, education and infrastructure. 

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