Oh No He Didn’t! Wait, But What Does GDP per Capita Actually Mean?

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During his recent trip abroad, Republican presidential nominee Mitt Romney caused a political stir in Israel (among other places he went) when he said that “culture makes all the difference” in explaining the vast difference in GDP per capita between Israel and its Palestinian neighbors.

And it’s not hard to understand why Palestinians might have been a bit ticked off by the remark: it’s basically saying that you’d be more financially successful if you changed your lifestyle. Harder to grasp, though, is the economic concept that Romney used in his comparison.

GDP per capita: One of those terms journalists and politicos throw out there as though it was something that normal humans conversed about at the dinner table. But what does it actually mean? And how is it relevant – or not – in determining a country’s well-being?

Put simply, Gross Domestic Product (GDP) is one (of many) ways to measure a nation’s income and level of productivity. The textbook definition will tell you: it’s the the market value of all goods and services that a country produces in a given period of time (generally a year).

In normal speak: it’s all the (legal) things that are produced and sold in a country, and all the wages and profits that are earned. Basically, an indicator of economic health and wellness.

GDP per capita, then, is the total GDP value divided by the number of people who live in that country.

So, for instance, let’s imagine your family’s house is a nation unto itself (work with me here): your dad’s a carpenter and makes, say, $50,000 a year selling his furniture. Your mom’s a lawyer and makes a salary of $70,000/year. You, however, are still in school and not working and thus, not making any income (freeloader!). So, the GDP of your household would be the sum of all those incomes: $120,000.

The GDP per capita, then, would be $120,000 divided by the number of people under your roof – the three of you. So … GDP per capita = $40,000.

GDP per capita is often used as a rough estimation of a nation’s general standard of living; the higher the GDP, the higher that standard. Of course, just looking at that figure alone can be pretty misleading, especially if there’s a lot wealth inequality within a particular country. Remember, that GDP per capita is just an average – it’s the income of a representative individual in a given country.

Take the United States, for instance: GDP per capita here is one of the highest in the world. And although the overall standard of living here is pretty high compared to a lot of other countries, there are also a lot of Americans who live in poverty.

Check out this explanatory animation on GDP per capita (I know, I know -  it’s econ – but it’s kind of interesting!)

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