The Weakness Of Relying On Income Per Capita Economics Essay

The Weakness Of Relying On Income Per Capita Economics EssayIncome per capita is how much cash each person earns in average in a exceptional time. It is used to indicate the delivery for an ara and to evaluate the sustenance standards and the smell of smell for dissimilar countries, nations or regions. It is usually taxd by dividing the bailiwick income of a hoidenish, which is the entire income of all the heap arising from a countrys gross house servant product (GDP), by the entire population of the country.Income per capita= jibe personal income of a country/ the entire population of the countryFor example, lets suppose there is a city where 1,000 deal ar making $200 per year and nose give the axedy people earning $1 genius thousand million per year so the income per capita is ($200x1000people)+($1 million x 100people) / 1100 = $91,091.b) The weakness of relying on income per capitaIncome per capita is a very useful animal to assess the wealth of a nation, espe cially when analyze to new(prenominal) nations. By exploitation income per capita, we gutter comp ar the economic well macrocosm of an unmarried in the country or the living standards between countries or the living standards within country overtime. Yet, it has a number of limitations why this may not be the right tool to determine well-being for an individual country.Firstly, when employ income per capita as measurement, the income distribution does not gauge precisely. Income per capita is an average. Hence, it neglects the income distribution within a country. Though the countrys GDP per capita may be very tall, it may be the fact that 10 percent of the population of the country makes millions of times to a greater extent than(prenominal)(prenominal) than other 90 percent of the population of the country who makes little wages. It nitty-gritty outliers who are within the population of a country (extremely poor or rich) can call for an uneven result on the overall ou tcome.Secondly, by looking at the example in (a), we can see all the authority that income per capita does not represent the true(a) living standards of the whole population of the city as it is the average income of a population and the income does not allocate evenly among all the population of the country.Besides, income per capita neglects the consequences of inflation. Income per capita entrust be unnaturally overstated if the scathes growth more rapidly in one country than in another.In addition, the amount of cash in different countries result have different cherishs due to the varying exchange rates. Hence, comparing income per capita country to country gives inaccurate results. It may be more appropriate to measure when comparing different years in an individual country.Whats more, just because a countrys income per capita is uplifted doesnt mean that country is high standards of living. It may be because of working hourlong hours, not because of earning high sa laries. The more people work, the more stress and the more workload they get. Working long hour makes the peoples stress level high and it reduces the personal leisure time which decreases the standards of living and gives less happiness in their lives.Furthermore, the values luffn up at income per capita do not include the case of the bullys is another fact why GDP per capita may not be the right tool to measure the living standards of life. The output may probably be increased. However, the uprights which are being produced are of poor prime(prenominal), therefore the quality of living standards may still not be getting better.Finally, real GDP does not take account statement of externalities which are third society costs that do have an effect on living standards of the population, for instance, over-crowding and contamination. These pose costs on third parties and represent real prospect costs for them, reducing their effectiveness disposable income, and hence living standards. Congestion, pollution and other ostracise externalities have obviously harmful effects on wellbeing. The time spent ill, results less working days and it cuts output, and moreover, the time being sick is an opport unity cost to leisure time.c) Factors that need to be include when using income per capitaWhen comparing income per capita between countries, we have to have a greenness base measure to compare income per capita in different countries to get more accurate result. To compare income per capita among countries, the input data which are gathered in the local funds has to be converted to the common base currency being used for the comparison, for example, US dollars.The problem of money inflation, which is mentioned in foreland (b), can be overcome by the use of money deflator by using a charge index and therefore, the real per capita income is being compared and a better result of relative standard of living is deduced.In addition, income per capita doesnt show how a countrys income is disturbed and it also neglects about environment, forgiving freedom and the value of leisure. As a result, one must also take into account other factors providing, such as longevity and peoples health, the distribution of income, the quality of environment, admission to education and many more to examine the real quality of life in different countries.All of the above factors need to be considered when using income per capita to assess differences in well-being among countries to make sure that meaningful comparisons are accomplished.d) Human Development IndexThe Human festering Index (HDI) is a standard means of measuring well-being. It is used to point out the clash of economic measures on quality of life.To assess the different countries living standards found on the fall and rise of incomes within that country, for instance, income per capita, is not an accurate way of determining that countrys development. There are a number of more of the essenc e(p) factors which should be assessed to get the real standard quality of life, for example, how sizeable people are, what their potential is as a human beings and how the environment in which they are living is. For the purpose of giving a more comprehensive measure of well-being in both social and economic variables among countries, the HDI has developed as an alternative way to measure other aspects of human developments. The basic invention of HDI is to assess the development of a country through people of a country being healthy, being educated and having substantially standards of living. The person whether having healthy lifestyle is measured by life expectancy. The life expectancy determines the convention lifetime of the people of a certain region. It is also an aspect for assessing the sensual life quality of a certain region. Being educated is one of the features in measuring HDI which is assessed by adult literacy and enrollment in primary, shopping mall and high s chool level. Having goodish standards of living is measured by get power parity, PPP and income. HDI is not a complete measure of development of countrys well-being. It does not take in important indicators, for instance, respect for human rights, dissimilitude and democracy. However, by using HDI, governments are able to assess countrys well-being against other countries in a better way instead of just cerebrate success on money statics and it gives a broadened view of the progress of human and the complex link between well-being and income.Question 2(a) deflationary gap takes place when the proportionality level of income is less than the full date income.Expansionary monetary policies should be carried out to overcome the deflationary gap of an economy. Normally, in this case, a central bank will raise the supply of money to solve the problem of deflationary gap by means of retain requirements and/or providing lower cheer rates. Expansionary monetary policy, in reserve, a llows banks to hold precisely a short amount of the total assets. Therefore, cash withdrawal can be available immediately and banks keep only a small amount of the total assets and the rest is put in liquid assets in the forms mortgages and loans. By reducing the reserve requirements, the funds of loan available are increased and it makes the money supply rise. By giving lower interest rates it encourage people and firms to borrow money and investment will rise. As the money supply increases, people will consume more goods and goods. As the expansion of business cycle gets underway, wealth gets higher and this will head to a multiplied increase in national income.(b) inflationary gap occurs when there is too much essential in the economy and it takes place when the equilibrium level of income goes over the full employment income.The inflationary gap can be controlled by implementing the deflationary fiscal policy. It could be done by raising taxes in some form and/or by reducing government spending. Either of these will slow pass the economy level of subscribe and will help to reach the equilibrium level of economic growth. Deflationary fiscal policy will probably increase the tax on expenditures which lead to increase prices and discourage people from spending too much, or it may increase the tax on income that will make people less money so that they can stop people from spending so much and this will have a multiplied effect on national income.(c)Question 3a. (i) Marginal returnUtility is a persons total satisfaction that obtained from when a customer consumes a good or service. Marginal utility is an redundant satisfaction which one person acquires from using one additional unit of a good or service. As borderline utility model is used by economists to examine how much units of good or service a customer will purchase, it is an essential economic concept. If the use of goods and function of an extra unit maximizes the total utility, it is positiv e marginal utility. It is a negative marginal utility if the use of goods and services of an additional unit minimizes the total utility.a. (ii) Demand curve for good YThe next diagram illustrates a lease curve D of an individual normal good Y, where P means the price charged for each unit of normal good Y and Q refers to the metre pauperizationed. The point a which intercept vertically of the accept curve demonstrates the highest price for each unit of good Y that a person is willing to pay.a. (iii) According to the lease curve above, the individual is prepared to pay an amount of a for the first unit of consumption of good Y. since the demand curve for a normal good slopes downwards, the individual is prepared to pay less and less for consumption their marginal valuation of the good falls with consumption. Under certain assumptions this marginal valuation (the height of the demand curve) can be thought of as a measure of marginal utility. (Note as Q increases, the individu als marginal valuation falls and hence marginal utility falls the principle of diminishing marginal utility.b. (i) Price elasticity of demandAccording to law of demand, a drop in price of goods increases the demand of goods. A measure of how much percentage of a good measuring demanded responds to changes of price of that good is price elasticity of demand. If the demand of a good responds considerably to changes in price, demand for a good is elastic. If the demand of a good responds only a bit to changes in the price, then demand for a good is inelastic.In formula,b. (ii)Given% change in quantity demand of good Z= (200-100)/100 x100 = 100% change in price of good Z= (5-10)/10 x 100 = -50Therefore, price of elasticity of demand of good Z= 100/50 = -2c. (i) The following diagram shows a linear demand curve and the associated marginal gross curve for a monopolist. The quantity demanded Q which is on the horizontal axis and the price P, on the vertical axis shows a linear demand cu rve, D for a good. Given that demand is linear, marginal revenue, MR is also linear and has double the slope the horizontal intercept of the demand curve, a, is twice that of the marginal revenue curve, a/2.c. (ii) the demand curve has unit elasticity nd = -1 at the point where marginal revenue is equal to zero. The inelastic and elastic regions of the demand curve are those points to the right and left of this point.