Critical Thinking Questions

8 . Is it possible for GDP to rise while at the same time per capita GDP is falling? Is it possible for GDP to fall while per capita GDP is rising? 9 . The Central African Republic has a GDP of 1,107,689 million CFA francs and a population of 4.862 million. The exchange rate is 284.681CFA francs per dollar. Calculate the GDP per capita of Central African Republic. 10 . Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change in the broad standard of living. a. The environment becomes dirtier b. The crime rate declines c. A greater variety of goods become available to consumers d. Infant mortality declines

Review Questions

11 . What are the main components of measuring GDP with what is demanded? 12 . What are the main components of measuring GDP with what is produced? 13 . Would you usually expect GDP as measured by what is demanded to be greater than GDP measured by what is supplied, or the reverse? 14 . Why must you avoid double counting when measuring GDP? 15 . What is the difference between a series of economic data over time measured in nominal terms versus the same data series over time measured in real terms? 16 . How do you convert a series of nominal economic data over time to real terms? 17 . What are typical GDP patterns for a high-income economy like the United States in the long run and the short run? 18 . What are the two main difficulties that arise in comparing different countries's GDP? 19 . List some of the reasons why economists should not consider GDP an effective measure of the standard of living in a country.

Critical Thinking Questions

20 . U.S. macroeconomic data are among the best in the world. Given what you learned in the Clear It Up "How do statisticians measure GDP?", does this surprise you, or does this simply reflect the complexity of a modern economy? 21 . What does GDP not tell us about the economy? 22 . Should people typically pay more attention to their real income or their nominal income? If you choose the latter, why would that make sense in today’s world? Would your answer be the same for the 1970s? 23 . Why do you suppose that U.S. GDP is so much higher today than 50 or 100 years ago? 24 . Why do you think that GDP does not grow at a steady rate, but rather speeds up and slows down? 25 . Cross country comparisons of GDP per capita typically use purchasing power parity equivalent exchange rates, which are a measure of the long run equilibrium value of an exchange rate. In fact, we used PPP equivalent exchange rates in this module. Why could using market exchange rates, which sometimes change dramatically in a short period of time, be misleading? 26 . Why might per capita GDP be only an imperfect measure of a country’s standard of living? 27 . How might you measure a “green” GDP?

Problems

28 . Last year, a small nation with abundant forests cut down $200 worth of trees. It then turned $100 worth of trees into $150 worth of lumber. It used $100 worth of that lumber to produce $250 worth of bookshelves. Assuming the country produces no other outputs, and there are no other inputs used in producing trees, lumber, and bookshelves, what is this nation's GDP? In other words, what is the value of the final goods the nation produced including trees, lumber and bookshelves? 29 . The “prime” interest rate is the rate that banks charge their best customers. Based on the nominal interest rates and inflation rates in Table 6.10, in which of the years would it have been best to be a lender? Based on the nominal interest rates and inflation rates in Table 6.10, in which of the years given would it have been best to be a borrower? Year Prime Interest Rate Inflation Rate 1970 7.9% 5.7% 1974 10.8% 11.0% 1978 9.1% 7.6% 1981 18.9% 10.3% TABLE 6.10 30 . A mortgage loan is a loan that a person makes to purchase a house. Table 6.11 provides a list of the mortgage interest rate for several different years and the rate of inflation for each of those years. In which years would it have been better to be a person borrowing money from a bank to buy a home? In which years would it have been better to be a bank lending money? Year Mortgage Interest Rate Inflation Rate 1984 12.4% 4.3% 1990 10% 5.4% 2001 7.0% 2.8% TABLE 6.11 31 . Ethiopia has a GDP of $8 billion (measured in U.S. dollars) and a population of 55 million. Costa Rica has a GDP of $9 billion (measured in U.S. dollars) and a population of 4 million. Calculate the per capita GDP for each country and identify which one is higher. 32 . In 1980, Denmark had a GDP of $70 billion (measured in U.S. dollars) and a population of 5.1 million. In 2000, Denmark had a GDP of $160 billion (measured in U.S. dollars) and a population of 5.3 million. By what percentage did Denmark’s GDP per capita rise between 1980 and 2000? 33 . The Czech Republic has a GDP of 1,800 billion koruny. The exchange rate is 25 koruny/U.S. dollar. The Czech population is 20 million. What is the GDP per capita of the Czech Republic expressed in U.S. dollars?