Question

1. Why is per capita GDP only an imperfect measure of a country’s standard of living? Provide examples and explain your answer.
2. What is the difference between a series of economic data over time measured in nominal terms versus the same data series over time measured in real terms? How do you convert a series of nominal economic data over time to real terms? Provide examples and explain your answer.

Answer 1

GDP is the sum total of value of goods and services produced within the geographical boundary of a country in a particular year. It gets distributed among people as income.So we may be tempted to treat ahigher level of GDO of a country as an index of greater well being of the people of that country.But the following are some reasons why its is not correct;

1.if GDP is rising the welfare may nit rise consequently because the rise in GDP be concentrated in few hands. And for the rest income may have fallen.For example suppose enthe year 2005 an imaginary country with 100 individuals each earning rupees 10 each.Therefore GDP of the country by income method is Rs 1000.In 2006 let is suppose the same country had 90 individuals earning rupees 9 each and rest of 10 individuals rupees20 each.The GDP for that year is rupees 1010.90 percent of people felt a 10percent fall in real income whereas only 10 percent was benefitted by arise in income by 100 percent when GDP increased.hence GDP is not a good index of welfare of a country.

2.Non -Monetary exchanges like for example domestic services women perform at home ,barter exchanges etc. are not counted in GDP .And that is underestimation of GDP.He ce GDP calculated in standard manner does not give a clear indication of well being of a country.

3.Externalities are benefits or harms a firm or an individual causes to another for which they are not paid or penalised.For example an oil refinery that refines crude petroleum and sells it in the market. The output of the refinery is the amount of but in carrying out the production the refinery may also pollute the nearby river and may cause various harms.This is an example of a negative externality, there can be positive ones too.Hence such externalities can underestimate the actual value of GDP.

The main difference between real and nominal data are:

The nominal value is one that is measured in terms of the actual price that exist at that time.And real value is the value measured in terms of certain constant set of prices.

Real value is the value after it has been adjusted for inflation.Generally real value is more important.

For example suppose a country only produces bread in the year 2000. it had produced 100 units of bread, price is 10 per bread.GDP at current price is 1000 rupees .In 2001 the same country produced 110 units of bread at price rupees 15 per bread therefore nominal GDP in 2001 was rupeesb1650(110×15).Real GDP in 2001 calculated at price of the year 2000 ie base year will be 110×10vime 1100 rupees.

To convert nominal economic data from different years into real , inflation adjusted data, the first time is to choose a base year arbitrarily and then use a price index to convert the measurement so that it can be measured in the price prevailing in the base year.