1. Explain whether you agree or disagree with each of the following:
(a) You have just read in the news that GDP in your country increased by 4% this year over last year. You therefore conclude that the quantity of output produced increased by 4%.
- I agree with the statement under the condition that there weren’t any inflation or deflation. If the inflation/deflation rate was 0% that year, the quantity of output has increased by exact 4%. However, if there were inflation/deflation, then the ‘actual’ quantity of output will be different.
(b) In the early 1990s, following the collapse of the Soviet Union, many eastern European and former Soviet Union countries experienced negative net investment for a period of time. This means there was a drop in their stock of capital goods.
- I disagree with this statement. Negative net investment does not mean that there was a drop in stock of capital goods. Instead, it means that the rate of increase in stock of capital good has dropped.
(c) If a government wants a measure of its population’s income per capita it should use GDP per capita; if it wants a measure of the quantity of output produced per capita it should use GNP per capita.
- I disagree with this statement. GDP per capita cannot be used to measure the population’s income per capita. They are different index. GDP per capita means the average amount of stuff one can produce and this does not necessarily mean the person’s income. Income per capita could be lower than GDP per capita. For example, you do not earn $10 dollars by selling $10 CD album. Instead, you earn money (income) from the margin. If you spent $5 to make that CD album, then your margin is $5. So the income per capita does not necessarily the same as GDP per capita.
- If one wants to measure the quantity of output produced per capita then they should use GDP per capita, not GNP per capita.
(d) GDP per capita is a better indicator of a country’s welfare than total GDP, because it calculates the amount of output produced per person in the population.
- I agree with this statement. Even if a country has $10 trillion as their GDP, like India, lots of people are under abject poverty. India’s GNP, instead, is way lower than its GDP. GNP is a better way of calculating a country’s welfare.
(e) The average American is 12.5 times richer than the average Russian, since US GDP per capita is 12.5 times greater than Russian GDP per capita, based on the dollar–rouble exchange rate. (The rouble is Russia’s national currency.)
- I agree with this statement. GDP per capita could be used to compare wealth of individuals in two separate countries. However, there is one flaw to GDP per capita. It is the unpredictable exchange rate. If rouble gets weak against a dollar, then GDP per capita of Russia could go lower. In converse, if it gets strong, its GDP per capita will increase. So if two countries had a similar (10-20% difference) of GDP per capita, then it will be hard to compare the individual’s wealth in those countries.
2. Compare and contrast the problems involved in measuring economic growth and measuring economic development. (10 marks)
- We should be clear in the definitions of two separate economic terms. Economic growth indicates the growth in GDP of a nation, normally, and economic development includes improvement in standard of living. Economic growth can tell you how an economy has grew in a country, however, the economic growth doesn’t necessarily lead to improvement of economic development. To say there was an economic development, there has to be several factors considered: life-expectancy rate, literacy rate, GDP per capita, and more.
3. Explain three possible limitations of using GDP as a measure to compare welfare between countries. (10 Marks)
- First, nominal GDP’s do not calculate inflation/deflation rate. So, it is limited in comparing welfare between countries.
- Second, exchange rate could alter the GDP of countries, therefore, it is limited in comparing welfare between two countries.
- Third, GDP does not include other activities such as illegal drug dealing or NGO activities. This could have large portion of a country’s GDP. For example, the illegal drug dealing has 20% of US GDP.