Question

Problem 1: Measures of national income

(a) Define (i) GDP (ii) GDP per capita (iii) GNI per capita
(b) What are the drawbacks of using GDP per capita as a measure of countries’ wealth? What is left out?
(c) Why do we need to adjust GDP per capita for purchasing power when comparing countries?

Answer 1

a)

1) GDP: GDP is called as Gross domestic product. GDP is the market value of all goods and services produced within a country over a specific time period.

GDP = C+I+G + NX

C = consumption

I = Investment

G = Government spending

NX = Net exports

2) GDP per capita : Economic output of a country to its people is called GDP per capita

GDP per capita = GDP/ Population

3) GNI per capita : The total national income of a country to its people tells the GNI per capita of the country

GNI percapita = Gross National income / Population

b)

The main problem with GDP per capita to measure countries wealth is that GDP will be used to calculate using different approaches where GDP does not consider the transaction which are down outside the market. GDP does not describe the wealth condition of a country and it will not consider the externalities that are present in the country. It does not consider pollution costs nor the lesiure time. So GDP per capita does not shows the actual measure of wealth in the country.

c)

GDP of a developed country will be higher than a developing country so when we want to compare those two countries without adjusting them to relative measure rather than absolute measure. GDP of a country is calculated under absolute basis which is same for every country so we convert them to relate measure by considering all the factors in every country, so we use PPP rate to convert GDP. Thus we use PPP GDP to compare to countries.