There is a large income discrepancy among countries. This is based on their GDP per capita, which ranges from low income nations at $10,000 or less per capita to high income nations at over $100,000. The five income groups are Low income ($10,000 or less), Lower-middle income ($25,000 to $50,000), Upper-middle income ($50,001 to $75,000), High-income ($75,001 or more). ..

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:

  • Expenditure on final consumption by households
  • Expenditure on final consumption by government ..

Gross domestic capital formation (GDCF), private final consumption expenditure (PCE), and excess of exports over imports by a country, called Net Exports, are three important measures used to measure the performance of a country’s economy. GDCF is the sum total of all private final consumption expenditures, plus any income earned by foreign citizens in the domestic territory of that country through foreign investments. PCE is the difference between the amount spent on goods and services domestically and the amount exported, minus any income earned by foreign citizens in the domestic territory of that country through foreign investments. The excess of exports over imports by a country is a measure used to determine whether a country is experiencing an export-led growth or import-led growth.

Gross National Income (GNI) per capita = Average Income per person (AI) This is also known as the “Per Capita Income” or “PCE”.

The average income in a country is the sum of all its individual incomes.

The total population of a country is the sum of the population of its component countries.

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 an increase in employment opportunities people can get to earn more amount money to spend on their wants and desires. ..

As a result of which, an increase in demand for goods and services will cause the production level to increase, which will require more raw materials, equipment, plant and machinery, laborers, and technicians. This will lead to an increase in financing costs for businesses, as they will need to invest more money in order to keep up with the increased demand. This will then lead to an increase in income across the economy as spending by one sector is matched by income from another. ..

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. Income 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

Average income is a commonly used measure to determine the level of income, the standard of living, and economic development in a country. However, it has several drawbacks which make it unsuitable for achieving accurate results. These include ignoring 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. As a result, this method is not capable enough of attaining accurate and fair outcomes. ..