A. What makes a country rich or poor?

The standard measure of wealth and poverty: per capita income

The standard measurement of whether a country is rich or poor (in economic terms) is called “per capita income” (“per capita” means “per person”). Per capita income is calculated by dividing the total market value of everything produced in a nation in a year by the number of people in the nation.

If we sort countries by per capita income, we get an idea of the differences in economic conditions between rich and poor countries.

For example, some “low-income” nations in 2012 were the Democratic Republic of the Congo ($400 per capita income, which is about $1 per day per person), Somalia ($600), Ethiopia ($1,200), Haiti ($1,300), Uganda ($1,400), Nigeria ($2,700), and Pakistan ($2,900).[1] These are average income figures, which included a small number of high-income people within each country (whose income numbers pulled the “averages” up). That means that more than half of the people in these countries were below these average levels of income.

“Low-middle-income” nations included Ghana ($3,300), India ($3,900), Honduras ($4,600), Guatemala ($5,200), Ukraine ($7,600), and El Salvador ($7,700). The next group, “high-middle-income” nations, included Albania ($8,000), China ($9,100), Jamaica ($9,100), Peru ($10,700), Colombia ($10,700), Brazil ($12,000), Mexico ($15,300), Chile ($18,400), and Hungary ($19,800).

Finally, in the “high-income” category were nations such as Poland ($21,000), Israel ($32,200), South Korea ($32,400), Japan ($36,200), the UK ($36,700), Germany ($39,100), Canada ($41,500), Sweden ($41,700), Switzerland ($45,300), the United States ($49,800), and Norway ($55,300). (The world map on the front cover of this book uses a color code to indicate per capita income for every country.)

Per capita income does not tell us everything we need to know about a nation. For instance, it does not measure important things that are not sold in the market, such as leisure time, religious faith, or strong families. But per capita income is the best numerical measure of whether a country is rich or poor in an economic sense.

Per capita income also does not tell us about the distribution of income—whether a large number of people share in the wealth of the nation or whether it is concentrated in the hands of a wealthy few. Increasing per capita income is not an adequate solution if only a few wealthy people benefit. Therefore, in the material that follows, we dis?cuss several steps that countries must take to prevent a small, wealthy elite from controlling all the wealth and power in a nation, as happens too often in poor countries today. We recommend numerous policies and values that enable a genuinely free market to function and thereby permanently open opportunities for any poor person to rise from poverty to an adequate income or even to prosperity (see chapter 4, section D; chapter 5, sections B, F, and G; chapter 6, sections B and C; all of chapters 7 and 8; and chapter 9, values 4, 5, 8, 9, 14, 15, 18, 21-24, and 29).

But increasing per capita income is very important, for as long as it remains low, the country remains poor. And higher per capita income is strongly correlated with some undeniably important factors, such as longer life expectancy, lower incidence of disease, higher literacy, and a healthier environment (for example, clean air and water, and effective sanitation).[2]

If a country wants to move up the scale from “low-income” to “middle-income” to “high-income,” what must it do? It must increase the total amount of goods and services that it produces, which means there will be more to go around. Remember that per capita income is calculated by dividing the total market value of everything produced in a nation in a year by the number of people in the nation.

To understand what is needed in more detail, it is necessary to understand the concept of gross domestic product (GDP).

  • [1] These numbers are based on purchasing power parity (PPP) rather than official currency exchangerates. Data for specific countries were taken from the CIA World Factbook, accessed March 7, 2013,https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html.
  • [2] See, for example, the strong correlation between per capita income and life expectancy in StephenMoore, Who’s the Fairest of Them All? (New York: Encounter Books, 2012), in the graph on 57.
 
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