The national income differs from country to country. Thereby categorizing them into Low income, Lower-middle income, Upper-middle income and, High-income nations.
How Is The Average Income Per Person Computed?
The World Bank every year, on the 1st of July, publishes a summary of the incomes of all the countries in its annual report. This income constitutes of expenditure on final consumption by the households and that of the government. Gross National Product or Gross National Income of a country constitutes of the following:
Gross domestic capital formation. Private final consumption expenditure. Expenditure by the government(s). Excess of exports over imports by a country, called Net Exports. Any income earned by the citizens of a country through foreign investments. Consequently, the income earned by foreign citizens in the domestic territory of that country is to be excluded for this purpose.
Gross National Income when divided by the total population, gives us the Average Income per person which is also known to be the Per Capita Income. It can be computed using the following formula:
Average Income= Gross National Income (GNI)
Total Population in a Country
What Does The Gross National Income Of A Country Indicate?
The Gross National Income is the total of incomes generated by all the factors of production namely, land, labor, capital, and, entrepreneur. Every factor of production contributes to the total income of a country. The income generated by them can be in form of rent, wages or salaries, interest, and, profits(in the form of dividends). The level of Gross National Income(GNI) in a country indicates the level of economic activities in that country. If the level of economic activity in a country increases, then subsequently the level of employment will go up. Therefore it will result in a higher standard of living which is necessary for overall economic development. With the increase in employment opportunities, people can get to earn more amount of money to spend on their wants and desires.
As a result of which, the level of economic activities in an economy gets accelerated. If the overall demand of households for goods and services increases, the firms will have to increase the production level to bring the supply at par with the increased demand. Therefore, the firms will be requiring more amount of raw materials, equipment, plant and machinery, laborers, and technicians to run and maintain the machinery. As a result, financing these expenses will require huge capital investments. In this way, the income circulates in the economy from one sector to the other, in a way that someone’s expenditure is someone’s income.
Income Determination And Its Relation With Purchasing Power Parity
The Purchasing Power Parity is a method used by macroeconomists, to measure the purchasing power of two currencies. It compares the prices of commodities often said to have been kept in a basket. The objective of this study is to ensure that the two currencies that have been compared are at par with each other. In order words, the two currencies are capable of buying the same number of goods.
This theory is pertinent to the determination of income at a global level. At the time of computing income at the world level, it is often calculated in Dollars($), making the process more intricate and complex. Since the income, before initiating any comparison, has to be converted into that country’s currency with which we are making comparisons. It is difficult to ascertain the price of commodities when they are in different denominations. Hence, the Purchasing Power Parity is brought into the light to ensure uniformity in computation.
Conclusion
Let us know about “Average Person Income Around World’, Average income is one of the commonly recognized methods, used in the macroeconomic theory to determine the level of income, the standard of living, and, the degree of economic development in a country. However, it holds up a few drawbacks as well which makes it unsuitable for achieving accurate results. It is because it ignores certain factors like the population not under employment, the demographic structure of a country, inequality of income and wealth in a country, and a few more. Altogether, this method is not capable enough of attaining accurate and fair outcomes.
