I’ve seen some people used per capita income as an argument for how progressive an economy has been. Nonetheless, these people could have been deluding themselves with this argument all along. Perhaps, if they’ve known the truth, they might want to visit the past to wipe off their smirks on this very topic. How come? Per capita income is very distorted in my opinion.
Per capita income equation is PCI = TPI/P. TPI is total personal incomes of everyone in a country and P is the population of a country. So, let’s assume a fictional country A has 4 trillion TPI and the population of 80 millions, then the per capita income for the fictional country A is 50 thousands. We can safely assume that this fictional country A has a high per capita income. In a perfect world where a country has everyone makes the same amount of income per year, it means each and everyone in this fictional country has the ability to make 50 thousands (money) per year.
Some people like to use the per capita income to boast about one’s own country wealth and progressiveness. Nonetheless, the simplistic per capita income equation doesn’t account for inflation. Since inflation isn’t being included in per capita income equation, per capita income cannot really be used to compare the wealth and progressiveness of countries.
Why inflation is important? Inflation is super important in an interconnected contemporary world like ours. Countries are trading with each other a lot more so than ever before, thus each country relies on endless information that come out from other countries that are known as global trade partners. Inflation is one of the important information that can help one country to assess a global trade partner’s economic stability.
Since inflation is important, we need to understand the simple concept which inflation represents. According to my layman conception of inflation, inflation is a measurement of the strength of market prices according to supply and demand. Although a currency for a country isn’t exactly meant to be a commodity in a market, but it’s too being affected by inflation. Since currency is too being affected by inflation, thus inflation can measure the implicit innate price of a currency.
For an example for why inflation is an important measurement of a country’s economic stability, let’s assume a fictional country A got into too much debts and has lost the trust from global trade partners. Since the fictional country A doesn’t have a stable economy and clean national budget, the global trade partners aren’t willing to lend the fictional country A some money, fearing the fictional country A cannot repay the future loans. Since each country has different currency, thus there must be a conduit to allow the measurement of currency exchange to occur. Once the conduit exists, each country can then use the currency exchange rates to decide how much a country’s currency is worth globally. Let’s assume the fictional country A has lost the trust of global trade partners and can’t receive more foreign loans, the demand for the currency of the fictional country A is shrinking massively on a global scale. Less demand for a country’s currency in the global market means the currency of such a country cannot be used effectively to bargain for global goods. Since nowadays, all countries are relying on global goods than ever before, thus local inflation can now be imported and exported. By this I mean although inflation can be used to measure the strength of prices for local goods and currency, but in the interconnected global world like ours inflation can also be used to measure the prices of goods and currency that are meant to be imported and exported for a country. The fictional country A is going to have to adapt to high inflation since the demand for its currency is very weak globally.
High inflation means too much money is chasing after a product, thus weakening the strength of the money and strengthening the strength of the price of a product. In the currency situation, high inflation means too much currency is chasing after a global trust. If the world decides to not trade with the fictional country A unless the fictional country A uses some hard assets or whatever that is valuable to exchange with another country’s reserve currency for the purpose of foreign trades, then the fictional country A’s local currency has become totally useless for global trade. This means high inflation for the fictional country A. People who are living in the country A can make 50 thousands (money) a year, but their 50 thousands income cannot really afford them to buy goods abroad, because the local currency is too weak to have a fair exchange rate in the global market. The fictional country A has to promise hard assets or whatever that is valuable to be traded with foreign loans (in a reserve currency) so the fictional country A can have some money to import global goods such as anything that needs to be imported.
In the interconnected world like ours, the fictional country A cannot be counted as a wealthy country, because its currency is too weak to be used as money for global goods. With high inflation, the fictional country A’s per capita income becomes meaningless unless the fictional country A’s currency is the most valuable and sought after for global exchange and reserve currency purposes.