What is GDP Per Capita

For most of us, GDP is a criterion that gives us an indication about how well or poorly our nation's economy is doing. Gross domestic product (GDP), gross national product (GNP) and net national income (NNI), all are indicators of a nation's economic power. Many scholars and critics argue that economic components that are included in calculating GDP per capita are unscientific and lack various critical aspects of the economy. Nevertheless, in almost all countries, it is used as a benchmark for measuring nation's economic progress.

Definition

Here is a simple definition of GDP,

"Total market value of the goods and services produced by a nation's economy during a specific period of time. GDP is customarily reported on an annual basis. It is defined to include all final goods and services - that is, those that are produced by the economic resources located in that nation regardless of their ownership and are not resold in any form. GDP differs from gross national product (GNP), which is defined to include all final goods and services produced by resources owned by that nation's residents, whether located in the nation or elsewhere." ~ Britannica Concise Encyclopedia.

Formula

Although calculating GDP is a complex process (and even understanding it), economists have derived certain mathematical formulas to measure the GDP per capita of a nation. If you ever wonder how to calculate real GDP per capita, then you've to firstly calculate GDP of the nation and then divide it by the total population. In calculating GDP of a nation, there are several ways to approach it. For instance, one way to calculate GDP is the Income approach, in which the total output of a nation is measured by calculating total income received by various factors of production owned by that country. The chief components that may be included in income approach are rents, salaries and wages, etc. Another method to calculate GDP is by expenditure approach.

The expenditure approach is an accounting method, that determines the total output of a nation by finding the amount of money spent. The basic formula for that is given as:

GDP = C + I + G + (X - M)

Where:

C = Household consumption expenditures / personal consumption expenditures
I = Gross private domestic investment
G = Government consumption and gross investment expenditures
X = Gross exports (goods and services)
M = Gross imports (goods and services)

Note: (X - M) is often written as X_N which stands for net exports

Lastly, to calculate GDP per capita, you've to divide GDP calculated by above methods by total population of the nation, that will give GDP per capita. It is to be understood that there is a drastic difference between GDP and GDP per capita. GDP of China, for instance is very close to that of US economy, however, GDP per capita of China falls way behind US, due to huge population of China!

GDP per capita and standard of living have been linked by economists. GDP per capita is an indicator of a nation's economic strength. Inflation and harsh economy affect GDP of a nation. Developing countries like India, that have been constantly recording a good GDP since for many years, are on a way for economic boom and growth. By comparing GDP per capita by country, countries are categorized as rich, in terms of growth and development, standard of living, etc. Luxembourg, as per data of 2009, is the richest country in the world, with highest GDP per capita of US$95,000.

It has to be kept in mind that GDP is a very technical term and understanding it deeply definitely requires lots of research and study. Prominent Nobel prize winning economists like Amartya Sen and Joseph Stiglitz have criticized GDP as a very poor indicator of nation's economic progress as many vital parameters are missed. Nevertheless, that is an ongoing debate among economic scholars and geniuses. For layman, a good GDP rate, in essence, brings hopes of growth and better opportunities.