As a matter of policy, we should be aware that “per capita real economic growth” is not the same thing as “perceived income growth.” Some economists use the term “perceived income growth” because people tend to perceive increases in income more favorably than increases in actual income. Other economists call this “liquidity” — meaning that it is easier for people to buy goods and services, both consumption goods and capital goods, when they have extra money floating around in their accounts. And yet other economists would say that liquidity is a good thing, because it encourages investment and helps to create demand for assets.
The United States has had a very rapid per capita real economic growth over the past two decades. The rapid pace of growth was a product of our ability to use credit to finance all of the expansion. In other words, when consumers spent more, companies could buy more goods and services at the lowest prices and pass those savings on to the buyers in the form of higher prices. All that was required was that consumers have enough liquid cash on hand to spend. Today, this is still true, but because of the widespread use of credit cards, many households are now deep in debt and unable to see their way out.
Inflation is also a negative factor that should be considered. Although it has been widely reported that inflation is the deflation of prices, there are actually two types of inflation. The first type of inflation occurs when, due to the rise of asset prices, an economy becomes over-valued relative to its ability to produce and sell goods and services. This is called hyperinflation, and it can cause severe damage to an economy by reducing employment and increasing consumer debt.
The other type of inflation is called economic deflation, which is essentially the opposite of hyperinflation. Inflation with this effect occurs when the cost of living reduces faster than the production or sale of goods and services. Although this can lead to a loss of consumer confidence and a reduction in spending, it can also cause per capita real GDP growth to decline. If a country has a lot of currency reserves, this effect is lessened; however, most countries do not. For this reason, inflation can be a very real problem for an economy if not addressed quickly.
One thing that has been noted as an indication of per capita real economic growth is the ease with which people can transfer money between bank accounts. For instance, back in the halcyon days of the last century, it would have been impossible to wire money abroad without going through a long, rigorous process that took several days to complete. Now, almost anyone can wire money home to his family members in minutes. Whether it is a business opportunity or a simple loan, most people see this as something of great benefit to them.
One other indicator of per capita real economic growth is political stability. No matter what the political climate, people seem to do well when they have access to safe and legal banking options. Political stability is also another indicator of economic performance, as no country can prosper without having a stable political establishment. This can be measured in many ways, . . . . . . including the relative strength of the national currency. Of course, the stronger the currency, the better the economy will perform.
The strength of the economy can also be measured by how much income goes into the private sector. As mentioned above, most countries have a very high per capita average income among its citizens. However, the correlation between economic performance and the rise of private sector income is a weak one. This means that countries with higher per capita incomes tend to have lower private sector incomes as well. For this reason, there is often a significant economic gap between the per capita income of the top earning group and that of the middle class or poor. Private sector income does not always translate into personal consumption, which is where money is spent on non-monetary goods like clothing, shelter and entertainment.
Finally, per capita GDP growth is sometimes a good indication of the performance of an economy's overall health. If the per capita GDP growth rate is increasing, then this means that the economy is prospering. An increase in per capita GDP typically signals an improvement in living standards and the potential for more economic activity. However, if the economy has grown more slowly, then this implies that underlying weaknesses in the economy remain unaddressed. When this is the case, sluggish economic growth is often followed by recessions or worse conditions, such as unemployment, rising interest rates and falling stock market prices.