6.4 Growth in Output or real GDP per Capita

Of course, it is not just how fast the real or potential output grows that determines how fast the average person’s material standard of living rises. For that purpose, we examine economic growth on a per capita basis. An economy’s output per capita equals real GDP per person.

If we denote [latex]N[/latex] as population, then

[latex]\begin{align*}\text{Real GDP per capita}=\frac{\text{real GDP}}{N}\end{align*}[/latex]

In Canada, for example, real GDP in 2021 was CA $2,185,910 million (annual rate). The Canadian population was 38.25 million. Real GDP per capita thus equaled 2,185,910 m ÷ 38.25 m =  CA $57,147. As of 2023, real GDP per capita for Canada has been declining because Canada is experiencing a faster rate of populate growth relative to real GDP growth.

We use output per capita to gauge an economy’s material standard of living. If the economy’s population is growing, then output must rise as rapidly as the population if real GDP per capita is to remain unchanged. If, for example, the population increases by 2%, then real GDP would have to rise by 2% to maintain the current level of output per capita. If real GDP rises by less than 2%, output per capita will fall. If real GDP rises by more than 2%, output per capita will rise. More generally, we can write:

[latex]\small\%\;\text{rate of growth of real GDP per capita}\cong\%\;\text{rate of growth of real GDP}−\%\;\text{rate of growth of population}[/latex]

For economic growth to translate into a higher standard of living on average, economic growth must exceed population growth. From 1970 to 2004, for example, Sierra Leone’s population grew at an annual rate of 2.1% per year, while its real GDP grew at an annual rate of 1.4%; its real GDP per capita thus fell at a rate of 0.7% per year. Over the same period, Singapore’s population grew at an annual rate of 2.1% per year, while its real GDP grew 7.4% per year. The resultant 5.3% annual growth in output per capita transformed Singapore from a relatively poor country to a country with one of the highest per capita incomes in the world.