Measuring economic growth.
Per Capita Income is the most common parameter used to assess a country’s economic development. The per capita income of a country is its gross domestic product divided by the population. Though a crude measure to assess the development level of a country, Per Capita Income is popular because of its simplicity. There is also some empirical evidence that per capita income is strongly correlated with boarder(broader) indicators used to assess the development of a country on different social, political, and economic dimensions.
Why(do) countries have low per capita incomes? A low per capita income country has low income because the country uses inefficient methods and processes to produce goods and services required in that economy. And in the process of increasing its per capita income, the country has to change its methods of producing goods and services, which in turn requires changing its social, political, and economic environment.
Comparison of per capita incomes of nations. For international comparison, the per capita income of countries is converted into a base or reference currency. The US dollar is a commonly used base currency. The per capita income of a country can be converted into US dollars by two ways: using the current exchange rate, and using the Purchasing Power Parity (PPP) rate.
In the exchange rate method, the per capita income of a currency is simply multiplied by the current exchange rate of the currency with the US dollar, to get that country’s per capita income in US dollars. This conversion, however, makes an important assumption, in that, an US dollar amount can buy the same basket of goods and services in different countries after converting those US dollars into local currencies. That is this method assumes that, if we gave US$ 1000 each to two persons, and sent one of them to France, and the other to Bangladesh, they would be able to buy similar goods and services in those countries after converting their US dollars into local currencies. Which we know is not possible. For example, the cost housing in French is not going to be the same as that in Bangladesh; the same is true about the cost of a haircut, of vegetables, and of medical and dental services. All these are non-tradable goods and services. They are non tradable from the point of view of international markets. Goods that trade in international markets, such as electronic items, wines, oranges, clothes, etc, tend to have comparable prices in different currencies as international competition does not allow large price gaps across countries. For example, it(delete) the price(of) a home computer in Bangladesh is far lower than that in France, businesses can ship computers from Bangladesh to France to make an easy profit. ............