What it means
Gross domestic product (GDP) is the total value of goods and services produced inside a country in a period, normally a year. On its own it favours large countries, because a populous nation can have a huge GDP while its people remain poor.
Dividing by population corrects for that and produces a figure that can be compared across countries of any size. Businesses use per capita GDP to judge where customers can afford their products.
A company deciding whether to sell premium cars, software subscriptions or financial services will look at the figure alongside other indicators to gauge purchasing power. Rising per capita GDP in a market often points to a growing middle class and rising demand.
There are two common versions. Nominal per capita GDP uses current prices and exchange rates, while a purchasing power parity (PPP) version adjusts for differences in what money buys in each country.
PPP figures are better for comparing everyday living standards, and nominal figures are better for comparing the dollar size of markets. Per capita GDP is not a measure of income, wealth or happiness.
Some GDP is earned by foreign companies and sent abroad, some is spread unevenly, and unpaid work such as caring for family does not count at all. A country can have a high figure and still have large pockets of poverty.
The figure is also sensitive to the denominator and to currency movements. If the currency weakens against the dollar, nominal per capita GDP in dollars falls even though domestic output has not changed, so analysts should look at the trend in local currency as well.
In practice
Real-world examples.
Example
A luxury fashion brand compares three emerging markets before opening stores. It chooses the one with the highest per capita GDP and the fastest growth, because customers there are most likely to afford its products. It then tests the choice with local income surveys before signing a lease.
Example
An international development bank classifies countries into income groups using per capita GDP. The grouping decides which loans a country qualifies for and on what terms. Countries that cross a threshold can lose access to cheaper lending.
Example
A software company prices its subscription differently by country. It sets a lower price in markets where per capita GDP is a fraction of its home market so that the product is affordable to local small businesses. The company tracks revenue per customer in each market to check the discount does not undercut its margins.
Formula
Calculation
Per capita GDP = GDP / population
Suppose a country has a GDP of $2,400,000,000,000 and a population of 48,000,000 people. The per capita GDP is 2,400,000,000,000 / 48,000,000 = $50,000. If population grows 2% to 48,960,000 while GDP grows 3% to $2,472,000,000,000, the new figure is 2,472,000,000,000 / 48,960,000 = about $50,490. Per capita GDP rose by roughly 1%, which is lower than the 3% GDP growth because more people share the output.Case study
Seen in the real world.
Meridian Appliances is an illustrative, fictional manufacturer deciding between two export markets. Country P has a GDP of $600,000,000,000 and a population of 120,000,000, while Country Q has a GDP of $300,000,000,000 and a population of 10,000,000.
Country P looks twice as large, but its per capita GDP is 600,000,000,000 / 120,000,000 = $5,000. Country Q's is 300,000,000,000 / 10,000,000 = $30,000, six times higher.
For a premium appliance range the company chose Country Q first, because each customer could afford the product, and planned a cheaper range for Country P later. The illustrative lesson is that market size and market wealth are different questions, and per capita GDP helps with the second. The company also checked that the high figure in Country Q was not driven by a single industry such as oil. It reviewed household income data and found that a broad middle class existed, which gave the team more confidence in the plan.
Watch out
Common mistakes.
- Reading per capita GDP as the income of a typical citizen, when it is an average of output that can be skewed by a wealthy minority.
- Comparing nominal figures between countries without considering that the same dollar buys different amounts in each.
- Ignoring currency movements, which can make dollar per capita GDP rise or fall without any change in real output.
Questions
People also ask.
Which is better, nominal or PPP per capita GDP?
Use nominal for the dollar size of a market and PPP for comparing everyday living standards, because each answers a different question.
Does a high per capita GDP mean everyone is rich?
No, it is an average that says nothing about how output is shared among households.
Why can per capita GDP fall when GDP rises?
If population grows faster than output, the same output is shared among more people, so the per person figure declines.
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