Population Density is the average number of people per square mile.
Population Density is an important factor in controlling disease. The higher a nation's Population Density, the higher the disease rate (which will lower the nation's actual population, lowering gross income).
Recommended Population Density for each city is 50 people per square mile unless a hospital is present in that city.
The formula used for population density when factoring Disease is different than the actual population density. The reason for this, is that Disease (based on Population Density) will kill a percentage of the Base Population, lowering the displayed Population Density. If there was no difference, the formula would feed back on each other.