Question

Give five limitations of using per capita income to compare the standard of living in different countries.

Answer 1

1. Inequality in income distribution. Per capita income in one country may be high but in the hands of very few people yet another country may have low per capita income, which is evenly distribution.
2. Inappropriate application of national income. Per capita income in one country may be high but used in a way that does not benefit citizens while in the other country, it may be used to finance projects that directly benefits the masses.
3. Effect in people’s health. High per capita income in one country could be achieved at the expense of the people’s health
4. Different interpretations of national income. One country may interpret her national income as gross domestic product at market price while another may interpret hers as net national product at factor cost.
5. Non-marketed output. A country heavily relying on subsistence sector may appear to have low per capita income because of un-marketed output compared with another where such as sector insignificant.
6. Price structure. Price structure may be different in difference countries e.g. food stuffs may be cheaper in one country compared to another.