Income is often an useful indicator of a society's quality of life and wealth. The government and other fact-finding agencies can measure a group or society's income in many different ways. The two most common methods are median income and per capita income.
Per capita income is calculated by adding the total income of a nation or state or county and dividing it by the total number of people in that geographic area. For a country, the total amount of income is equal to its gross domestic product, or the market value of all final goods and services, which includes the income generated by each person in that country. Per capita income is often cited when comparing the income of one nation or geographic area to that of another.
Per capita income can be a useful indicator when it includes a large number of people, like that of a country, but when applied to smaller groups of people, it can be problematic. When per capita income is cited, it doesn't usually account for or remove extreme values of income like those found in households without employed persons or those with incomes in the highest percentiles. These extreme values can make the overall date appear higher or lower than it actually is. As a result, per capita income is often an unreliable indicator of the average person's income.
The median income of a group of people is determined by dividing that group of people into two different segments, one above the median and one below. For example, if the median income for a family in a town is stated as $45,000, that means that half of the families in that town have an income higher than the median and half have an income below $45,000. Median income is often cited in government surveys of income and can be further broken down by family and household to include those who live alone as well as people who live together but are not related.
When the median income of a group is calculated, it automatically removes those values that are at the furthest ends of the income distribution. By doing this, data calculated based on median income is able to yield a more accurate representation of the group being surveyed. As a result, median income is often preferred over per capita income by fact-finding agencies, particularly when the data are obtained from a relatively small group of individuals.
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