Per capita income as a measure of economic development

Some economists ( Harvey Leibenstein, Rostow, Baran, Buchanan) and many others favour the use of per capita output as an index of economic development. They believe that economic growth is meaningless if it does not improve the standard of living of the common masses. Such a view holds that economic development be defined as a process by which the real per capita income increases over a long period time.

The UNO experts in their report on ‘Measures of Economic Development of Under-developed Countries’ have also accepted this measurement of development. Charles P. Kindleberger also suggested the same method with proper precautions in computing the national income data.

Arguments in favour of per Capita Real Income:

The aim of economic development is to raise the living standard of the people and through this to raise consumption level. This can be, estimated through per capita income rather than national income. If national income of a country goes up but the per capita income is not increasing, that will not raise the living standard of the people. That way, per capita income is a better measure of economic development than the national income.

Increase in per capita income can be better index of an increase in the welfare of the people. In advanced countries, national income has increased much faster than the growth rate of population. It means the per capita real income has been constantly increasing and this has led to the increase in welfare of the people. That way, per capita income can be considered a better index of the welfare of the people.

Arguments against Per Capita Real Income:

The real per capita income, a measure of economic development has been severely criticized by  economists such as Jacob Viner, Kuznet, Meier and Baldwin.

(a) According to Meier and Baldwin, “If an increase in per capita income were taken as the measure of development, we would be in the awkward position of having to say that a country had not developed if its real national income had risen, but population has also risen at the same time.”

If in a country an increase in national income is offset by the increase in population, then we would be bound to say that no economic development has taken place. Similarly, if national income in a country has not gone up but population has reduced due to epidemic or war, in that case we would be bound to conclude that economic development is taking place.

(b) In this measure, distributive aspect has been ignored. If national income goes up but there is unequal distribution of income among different sections of the society, in that case rise in national income will be meaningless.

(c) In the underdeveloped countries where per capita income is regarded as a measure of economic development, with the increase in per capita income of these countries, there is also increase in unemployment, poverty and income inequalities. This cannot be regarded as development.

(d) Economic  is development is a dimensional concept which involves not only increase in money income but also improvement in social activities like education, public health, greater leisure etc. Such improvements cannot be measured by changes in per capita real income.

(e The data of per capita national income are often inaccurate, misleading and unreliable because of imperfections in national income data, and its computation. That way, per capita real income cannot be free from weaknesses.

However, despite these drawbacks in the measure of real per capita income, many countries have adopted this measure as an indicator of economic development.

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