Sunday 19th November, 2006


Measuring wealth with per capita income

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Distributional justice is the coinage of economists who seek to explain how income is distributed, and why some people are rich, and the majority are poor. Per capita income is a statistic that doesn’t recognise the disparities.

Commonly per capita income is measured in a widely used currency, and ours is measured in terms of United States dollars. In Europe it may be measured in terms of Euro dollars.

It is calculated by taking the personal incomes of all individuals, and dividing that total by the total number of people in the population. It is closely tied to GDP, in the way we measure the statistic.

Recent Central Bank statistics reveal a GDP per capita of almost $14,000. It has risen from some $6, 970, a few years ago to new heights, measured in US dollars. But what does that mean for all of us?

Higher earnings

Per capita income is really a reflection of an average. However, it is used as a measure of the wealth of a country. A small group of the very rich in any one country can significantly slant the statistic. And this truism could blow the distributional justice theorists into the realm of wishful thinkers.

The fundamental question is what causes the overall rise in per capita income. Are we as a group of workers earning higher incomes, or is it that more people are now earning an income, as reflected in the fall of the unemployment rate from some 8.4 per cent for October 04-March 05, to 6.8 per cent in a corresponding period for 05-06. This is also projected to reach six per cent by December.

It could also mean that in certain sectors wages/salaries have increased. While other sectors may have not benefited from such an experience. For example, what was a brick layer, earning in 2001, and what is he earning today? Compare that with your own increases.

The next fundamental question is who is saving as a result of higher earnings?

There is a perception that the people who are benefiting from the increased cash flows, are either bent on spending it off quickly, or else they belong in a different category. At some extreme, is the excess accumulations being sent abroad and invested there? And what does that do for us locally?

Our local statistic shows a decrease in the saving rate in the country, and that does not auger well for long term stability. But can investments abroad help us?

The short answer is yes. Remember that GDP refers to domestic production, and the other economic indicator is GNP. This statistic is our gross national product and it includes those investments and factors of production that are located outside of the country.

The assumption is that we benefit when the gains realised abroad are returned home to the benefit of the economy.

I take a lot of the comfort that one of our major investments abroad is bundled in the human capital, which has gone forth to expand their dreams and benefit from the global impetus in trade and training, across borders.

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