The rate of growth of nominal GDP is 10 percent. The rate of inflation rate is...

The rate of growth of nominal GDP is 10 percent. The rate of inflation rate is 5 percent. The rate of growth of the population is 1%. What is the rate of growth or real GDP per capita? (b) What is the problem with using GDP (and GDP per capita) as a measure of economic performance and welfare?

Expert Solution

(a)

Real GDP (RGDP) = Nominal GDP (NGDP) / Price level

RGDP per Capita = RGDP / Population = NGDP / (Price level x Population).

Therefore,

Growth in RGD per capita = Growth in NGDP - Growth in price level Inflation) - Growth in Population

= 10% - 5% - 1%

= 4%

(b) GDP is insufficient as a measure of economic performance and welfare because of following reasons.

GDP does not include services which do not have any market (imputed) value.
Some goods or services may increase GDP but residents do not experience higher quality of life, for example, an increase in defense expenditure raise GDP but do not enhance quality of life.
GDP ignores costs of growth in the form of higher pollution, environmental damages, negative externalities and market failure, which lower the quality of life.
Change in quality of goods or technological advancements, which enhance standard of living, is not reflected in GDP.

Rahul Sunny answered 2 years ago

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