Due to limitations of national income as an indicator of development, economists like Rostow, Baran and Leibenstein etc. favored the use of per capita income as an index of development.
The UN experts in their report an, “Measures of Economic Development of Underdeveloped Countries” have also accepted this criterion. Broadly speaking per capita income refers to the real national income divided by the total population of the country.
If the rate of population surpasses the rate of national income growth, then per capita national income will fall. Similarly if both national product and population grow at the same rate, per capita national product will remain constant. This is not economic development.
Therefore it is not rise in real national income but rise in real per capita income which may be taken as an indicator of development. Hence there is the urgent needs to check the growth rate of population and to accelerate the rate of national growth, particularly in underdeveloped countries so that the real per capita income will rise.
Per capita income as an indicator of development has the following limitations:
1. Per capita income does not reflect the standard of living of the people. Per capita income is an average and this average may not represent the standard of living of the people, if the increased national income goes to the few rich instead of giving to the many poor. Thus unless national income is evenly distributed, per capita income cannot serve as a satisfactory indicator of development.
2. If per capita income is the measurement, the population problem may becancealed, since population has already been divided out. The field of enquiry is then unduly narrowed. As Kuznets warns, the choice of per capita, per unit or any similar measure to gauge the rate of economic development carries with it the danger of neglecting the denominator of the ratio.
3. An increase in per capita income may not raise the real standard of living of people. It is possible that while per capita real income is increasing per capita consumption of goods and services might be falling. This happens when the Govt. might itself be using up the increased income for massive military build up necessitating heavy production of arms and ammunitions.
4. Although an increase in output per head is in itself a significant achievement, yet we cannot equate this with an increase in economic welfare. Let alone social welfare without additional considerations. Since development is multidimensional education, health, work-leisure ratio etc. are important considerations which do not get reflected in per capita income.