macroeconomics, man. (Chapter 11 Q & A)

17/02/2013 § Leave a comment

#3. 25 marks.

a) Explain the process by which nominal GDP is calculated and distinguish it from real GDP.

Nominal GDP is the current value of all final goods and services a country produces in a given amount of time. Real GDP is the value of all final goods and services a country produces in a given amount of time but measured against prices of predetermined base years. Nominal GDP can be calculated with the following equation: GDP = C + I + G + (X – M). This means adding the consumption (total amount of durable and non-durable goods and services purchased by private individuals and households), the investments of a country’s firms and households, government spending, and net exports (which is imports subtracted by exports). Whereas the nominal GDP shows the current price after the effect of inflation or deflation, real GDP tries to avoid this. Calculating real GDP involves using nominal GDP and the GDP deflator, and if there had been deflation in the economy, the resulting GDP would be higher than the nominal value. Likewise, if there had been inflation in the economy, the resulting real GDP would be lower than the nominal value in order to reflect a country’s real output.

b) To what extent do measures of GDP accurately estimate national well-being?

The raw GDP both overestimates and underestimates the nation’s well-being. The GDP calculates all total consumption and spending, which includes all negative spending, for example, the money spent to jail criminals, fight warfare, and consume unhealthy products (smoking, drugs, alcohol). Similarly, the GDP doesn’t report on how much natural resources are lost in the production of certain goods. The destruction of forests and mines and the increased amount of endangered species that come with the production of goods (like books and paper or furniture) are all included in the GDP. On the other hand, other factors that do contribute positively to the economy are not included in the GDP, for example unpaid output like volunteer efforts, housework and childcare, technological and managerial techniques that improve firms’ efficiencies, and the work of poor farmers in the more subsistence economies. Raw GDP also lacks information that further informs policy-makers on the well-being of the nation like the life expectancy of the people, income distribution among the people, and a country’s purchasing power (poorer countries might be able to purchase more with a certain amount of money than richer countries can with that same amount of money).

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