Question

C. Now, provide short answers to the following questions.

i. Between 1929 and 1933, NNP measured in current prices fell from $96 billion to $48 billion. Over the same period, the relevant price index fell from 100 to 75. What was the percentage decline in nominal NNP from 1929 to1933? What was the percentage decline in real NNP from 1929 to 1933? Show your work.

ii. You find that your paycheck for the year is higher this year than last. Does that mean that your real income has increased? Explain carefully.

iii. U.S. real GDP is substantially higher today than it was 60 years ago. What does this tell us, and what does it not tell us, about the well-being of U.S. residents?

Answer 1

1) Nominal NNP fell from $96 billion to $48 billion

% decline in Nominal NNP = [(48 - 96) / 96] * 100 = 50%

Price Index in 1929 = 100

Price Index in 1933 = 75

Real NNP in 1933 = $48 billion * (100 / 75) = $64 billion

% decline in Real NNP = [(64 - 96) / 96] * 100 = 33.33%

2) Nominal wage Increase = Real wage Increase + Inflation Rate

Your Nominal paycheck may be higher. It does not mean that there is increase in real income because nominal income is comprised of real income and inflation rate. If there is inflation rate in economy which always prevails there, growth of real income would be less than growth of nominal income.

3) U.S. real GDP is higher today than it was 60 years ago. Growth of real GDP can be used as a growth indicator but it is not a perfect measure. Growth rate of real GDP does not measure the well being of people accurately because:

• Growth in real GDP muct have neglected environment at some point of time which depletes quality of life of people. Decrease in quality of life is not measured under real GDP growth.
• Growth of real GDP does not measure whether people are happy or not with this production speed.
• Increase in real GDP must have increased income inequality among people which makes poor more poorer.
• Technological advancement is not accounted in real GDP growth.