Why do we use average ? …

Averages are used to compare different countries, states, or regions. Since countries have different populations, comparing total income will not tell us what an average person is likely to earn. Averages have many limitations.

(a) They don’t give us the true picture regarding the distribution of income.

(b) Averages don’t give us any information regarding the non-materialistic goods and services.

Limitations of Average Income 

While averages are useful for comparison, they also hide disparities.

For example let us consider two countries- A and B. For the sake of simplicity, we have assumed that they have only five citizens each. Based on the data given in the table, let us calculate the average income for both the countries.

Comparison of Two Countries

Will you be equally happy to live in both these countries? Are both equally developed? Perhaps, some of us may like to live in country B if we are assured of being its fifth citizen, but if it is a lottery that decides our citizenship number, then perhaps, most of us will prefer to live in country A. This is because even though both the countries have an identical average income, country A is preferred because it has more equal distribution. In this country, people are neither very rich nor extremely poor, while most of the citizens in country B are poor, and one person is extremely rich.

Hence, while the average income is useful for comparison, it does not tell us how this income is distributed among the people.