Global income and income distribution
Case Study
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| Teacher's Notes | Student Activities |
| Introduction |
Different people have different incomes. A shop assistant might earn $25 000 per annum, a chef $40 000, an architect $80 000, while the chief executive of a large company might be paid $500 000 or more each year.
Just as individuals have different levels of income so do countries. Some countries we would recognise as rich with a high total income (for the country as a whole) and high per capita income (per head of population), while others are poor with low levels of income. When we talk about the income of a country we mean the value of that country's production or output. Dividing this by population gives per capita income.
| Table One: Total output and income per capita for selected countries | ||
| Country | Total output/income (GNP $US billions 1998) | Income per capita (GNP per head of population $US 1998) |
| Switzerland | 284.8 | 40 080 |
| USA | 7 921.3 | 29 340 |
| Australia | 380.6 | 20 300 |
| PNG | 4.1 | 890 |
| Bangladesh | 44.0 | 350 |
| Vietnam | 25.6 | 330 |
| Cambodia | 3.0 | 280 |
| Ethiopia | 6.1 | 100 |
(World Bank - World Development Report 1999/2000 World Bank Publications 1999)
| Measurement of global income |
The standard measure of a country's income is based on Gross National Product (GNP) per capita or per head of population.
GNP is a measure of a country's total income. It measures the total income earned by the citizens of a nation. Sometimes Gross Domestic Product, which measures a country's production or output is used as an indication of total income. The two produce slightly different results but are the best indicators available to economists and statisticians of a nations' income.
FIGURE ONE
| Australia's income per capita (GDP)1997/98 = | 565 881 000 000 Australian dollars |
| ----------------------- | |
| 18 000 000 (population) | |
| Vietnam's income per capita (GDP) 1998 = | 368 692 000 000 000 Vietnamese dong |
| ----------------------- | |
| 77 000 000 (population) |
These figures use each nation's own currency. This makes it impossible to compare one country with another. International comparisons require conversions into a common currency, for example, $US, or other statistical measures that allow comparison.
| Measurement problems |
There are a number of difficulties in comparing income data from one country to another. For example:
- Data accuracy - some nations are not able to collect and generate accurate GNP and GNP per capita statistics
- Composition of data - the GNP statistics generated by different countries do not always include the same information. For example, many countries include estimates for home grown food in their GNP, others do not
- Common currency - we need to convert GNP to a common currency, usually to $US, but the conversion or exchange rate (the amount a particular currency is worth in $US) may vary from one year to the next
- Importance of relative prices - using a standard currency such as the $US does not take account of the differences in relative prices from one nation to another which effect the purchasing power of a particular level of income. To deal with this, GNP can be calculated using 'Purchasing Power Parity' dollars (PPP$). This measures the relative purchasing power of different currencies over the equivalent goods and services using the number of units of a country's currency required to buy the same amount of goods in the domestic market as a dollar in the USA. But PPP$ measures do have a significant margin of error
- Per capita figures are only averages - an average figure gives no indication of the actual distribution of income within a nation. Average GNP per capita might be relatively high but a small proportion of the population might have very high incomes and the majority very low
- GNP figures are financial measures - GNP per capita can only tell you about money income, they do not measure how well off people are in terms of their human development or standard of living.
| Global statistics |
The World Bank measures global income distribution based on GNP per capita in both $US and Purchasing Parity Power (PPP$). It classifies nations into low, lower middle, upper middle and high income groups.
| Table Two - Country classification on income | |
| Low Income | Less that $765 per capita |
| Lower Middle | $766 to $3 035 |
| Upper Middle | $ 3 036 to $9 385 |
| High | Above $9 386 |
(Figures in $US for 1995, The World Bank - World Development Indicators 1997)
Study World Bank world development indicators income table. (http://www.worldbank.org/data/wdi2000/pdfs/tab1_1.pdf)
The statistics (from the above website) show the differences between countries' income distribution. Ethiopia, for example, has the lowest income at $US 100 per capita. The highest is Switzerland at $US 40 800 per capita. That is, in 1998 the per capita income in Switzerland was 408 times that of Ethiopia. In 1998 the 20% of the world's people who live in the high-income countries had 82 times the income of the lowest 20%. Statistics show 60% of the world's population receive only 6% of world income. The high-income nations contain 17% of the world's population yet receive 78% of world income.
| Income, poverty and human development |
The World Bank defines poverty as the inability of people to attain a minimum standard of living. We probably all have a sense of what poverty is but actually measuring poverty is much more difficult. The United Nations and World Bank use $1-$2 (PPP) per day as an international poverty line, indicating a lack of access to basic sustenance. In 1998 1.2 billion people had consumption levels less that $1 per day and 2.8 billion less than $2 per day.
Using a single financial indicator of poverty may not give a real picture of the quality of life people are leading. Per capita income may be the same in two countries but people may experience quite different living conditions because the way income is translated into human development varies from one country to another.
To gain a better picture of living standards the United Nations has constructed two indicators:
- Human Development Index - based on life expectancy at birth, educational attainment and income per capita
- Human Poverty Index - based on percent of population expected to die before age 40, percent of adults who are illiterate, percent people without access to health services and safe water and percent underweight children.
| Conclusion |
The uneven distribution of global income and world poverty are the most significant issues facing the world today. Improvements have occurred with real income per capita growing, infant mortality and malnutrition declining and life expectancy increasing. Australia's aid program aims to assist developing countries to reduce poverty through sustainable economic and social development.
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