Question

Country A has 100 machines (physical capital) and a population of 100 (out which 80 are in the labour force). Discuss the effect on real GDP per capita if a. Population doubles (keeping machines constant at 100) b. Machines double (keeping the population constant at 100) (300-400 words)

Answer 1

1 Physical capital = 100 machines

Output per machine = a

Total output = 100a

GDP = 100*a

Per capita GDP = 100(a/a) = a

real per capita GDP = a / GDP deflator

a) Population doubles

GDP per capita = (100 a) / (200 * GDP deflator)

= (0.5 a) / (GDP deflator)

b) Machines double keeping the population at 100

GDP = 200 a

GDP per capita = (200 a) / (100 * GDP deflator ) = (2a / GDP deflator)

GDP

GDP is a measure of the value added through the production of services and goods in a nation over a certain period of time. This indicator is a metric for economic activity. It is not indicative of material well-being of a society. Income is for this produce.

Nominal GDP is the GDP in value or the GDP at current prices. The metrics are USD per capita, and, USD. The compilation is as per the System of National Accounts. The indicator is suited for comparisons over a certain period of time. As prices change one can use the price level to find GDP at current or existing price levels.

Real GDP

GDP value at a certain base price level is termed Real GDP.

GDP deflator is a metric for inflation. It is also known as an implicit price deflator.

GDP deflator = (Nominal GDP / Real GDP ) * 100

One can carry out a comparative study of real economic activity between two years. If deflator value is negative, deflation has been experienced. GDP attaches a value to the goods and services produced in the country.