Posts tagged macroeconomics

Data Response – Measuring National Income

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.
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Intro to Macroeconomics

Today in the class, we have learned simple diagrams about the economic transactions between firms and households. As you see in the diagram, the households provide factors of production (FoP) to the firms. Firms gives wages or rent for the factors of production provided by the households. The firm then provides the service or good by using these factors of production to the households. The households in reture gives payment to the firms for the service or the good.

We have learned about several economic terms such as GDP. GDP means Gross Domestic Product and it is the Total Value of all Spending in an Economy. It is the Total Value of all final Goods and Services in an Economy regardless of who owns the productive assets.

Unlike GDP, GNP encounters for the total income earned by a nation’s factors of production regardless of where the assets are located. For example, lets say that there is one British businessperson doing business in Japan. His buisness is part of Japan’s GDP, but it is not part of Japan’s GNP. It is the part of UK’s GNP.

GDP per capita is GDP divided by population of that country. It is often used to show how much wealth each person has. However, there is one flaw with this index. If there is a huge disparity between the rich and the poor, like in United States, this value means less compared to when there is less disparity between rich and poor. According to Ms. Q in the class, only 1% of United State’s population owns 49% of financial wealth. So, GDP per capita is not always accurate.

GDP per capita is often used to evaluate one country’s standard of living, however, as it was stated, it is not always accurate. For example, there could be several trillionares and billions of poor in a country. As an alternative, many scholars use HDI to evalute standar of living of countries. It encounters for life expectancy, literacy rate, education, public health system, and etc. It looks at the different point of view compared to GDP per capita. According to the lecture today, Cuba has less thant 5000$ per capita, however, it has almost 100% literacy rate, which shows that it has high standard of living.

Extra Info: GDP can vary according to the country’s currency exchange rate to USD. As GDP is in US dollar, other foreign countries have to convert their currency to USD. For example, if the exchange rate goes down (value: Foreign currency<USD) the total GDP of the nation decreases. On contrary, if the exchange rate goes up, the total GDP of the nation increases dramatically. So this is one drawback to GDP.

There is an economic index called PPP that covers up the problem of GDP. “Purchasing power parity exchange rate is the exchange rate based on the purchasing power parity (PPP) of a currency relative to a selected standard (usually the United States dollar)” (wikipedia.org) So it gets rid of the exchange rate drawback of GDP and gives more reliable data. However, there is one problem with this also. It is very difficult to measure the differences in quality of goods.

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