Limitations of using per capita income in comparing standards of living between countries
- Differences in income distribution. Per capita income does not show the nature of income distribution in the different countries. A country may be having a high level of per capita income yet there exists high levels of income inequalities
- Differences in the quality and composition of goods and services consumed in different countries. A country may be having a high per capita income when the economy is concentrating on the production of capital goods which do not directly contribute to the welfare of the people.
- Differences in the accuracy and tools used to estimate population and national income figures. The country’s high per capita figures may be as a result of under estimating the population figures and over estimating national income figures and this may not necessarily reflect better standards of living
- Differences in the levels of inflation (prices).The per capita income may be high when the general price level of goods and services in the country is high. This does not necessarily imply high standards of living but high cost of living in the country;
- Differences in the size of the subsistence sector. The per capita income figures may be low due to the existence of a large subsistence sector in the country. This is because it is difficult to include subsistence output when estimating national income. This does not necessarily imply low standards of living.
- Differences in production and transport costs. The per capita income may be high when the country is High production and transport costs. This does not imply better standards of living.
- Differences in the amount of leisure enjoyed in the two countries. The country may be having high per capita income figures at the expense of leisure. This leads to low standards of living
- Differences in non-material benefits enjoyed by the people, for example freedom of expression and self-esteem which is not reflected in the per capita The per capita income figures may be high when the citizens are not allowed to freely express themselves.
- Differences in availability of social services like education, health and communication services. The country’s per capita income figures may be high when social services are either of poor quality or inadequate. This does not imply better standards of living.
- Differences in the levels of employment. Per capita income figures may be high when there are more unemployed people in one country as compared to the other. This does not imply better standards of living in that country.
- Differences in tastes and preferences. The per capita income of the country may be high when the goods and services produced do not meet the tastes and preferences of the consumers.
- Differences in boundary of production. The per capita income of the country may be high when certain items are included in the calculation of national income and yet they are excluded from another country. This does not imply low standards of living in the country where they are excluded. For example incomes from gambling and
- Differences in currencies. Countries use different currencies and therefore their per capita income figures appear in different A country may be having high per capita income figures when the exchange rate value of its currency low as compared to another country. This does not imply high standards of living.
- Differences in the methods used to measure national income. The per capita income figures may be high when the country uses the expenditure approach instead of the output The high expenditures may be as a result of the high prices of goods and services which does not reflect high standards of living.
- Differences in political climate between countries. The per capita income figures may be high when the country is experiencing political instabilities especially when the country uses the expenditure approach of measuring national This does not imply better standards of living.
CATEGORIES Economics
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