At the beginning of December the media reported that Papua New Guinea’s population doubled overnight as researchers had worked out that it must be 17 million rather than 9.4 million. The explanation was that the population living in the remote highland interior, where people survive through subsistence hunting and farming, had been underestimated.
The new figure, the Daily Mail wrote, meant ‘the country’s per capita income is slashed by half, making the average salary around £930.’
This suggests that the population of Papua New Guinea had suffered a drastic cut in their living standards. In fact, it made no difference. People’s income was not affected at all. All that changed was the statistic for average income obtained by dividing the country’s Gross Domestic Product by its population. As the figure for population increased while GDP remained the same, the average fell.
This shows how the figure for a country’s GDP per capita can be misleading. In the case of Papua New Guinea, particularly misleading. GDP is a measure of the market price of all the new goods and services produced in a year and so does not take into account goods and services that are not marketed, such as those produced directly for their own use by the subsistence hunters and farmers in the country’s interior. They produce wealth but as this is not sold it is not counted when calculating GDP. Yet their number is taken into account for calculating GDP per capita. Logically, it should not be, but only those who receive a monetary income from which to buy what they need to ‘subsist’.
But even that would be misleading as not all the money income from GDP goes to wage-earners. A large part is the income of businesses as their profits. The Daily Mail is wrong in saying that the new population figure slashed ‘the average salary’. GDP per capita is not a measure of this. It is an average of all money income — profits and income from self-employment and government transfer payments as well, not just income from working for a wage or salary — divided by population.
According to Investopedia, ‘GDP per capita shows how much economic production value can be attributed to each individual citizen’ (bit.ly/2BJ7p2V). This suggests that it might be a measure of how much each person in a country contributed to the value of what is produced. But it is not that either. The whole of GDP is indeed attributable to what wage-workers produce in a year. But only a portion of that goes to them and their dependents.
The Economics Help blog says: ‘High real GDP per capita indicates citizens are able to purchase more goods and services’ (bit.ly/3QzLa2k). Not necessarily, as that will depend on how GDP is divided between profits and income from work. If GDP per capita goes up due to a higher proportion being made up of business profits, then ‘citizens’ might not be able to purchase more.
Per capita figures are misleading because they ignore that ‘the population’ includes owners of businesses which bring in a high total income as profits, which distorts the average making it seem that the individuals in the rest of the population get much more than they do.
It is not just figures for new marketable wealth that are distorted but also for other things such as water consumption and carbon emissions. Per capita figures for these, by attributing business’s contribution to everyone, give the impression that individuals use more water or have a larger carbon footprint than they actually do.
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