Review questions L1 Flashcards
- Give some reasons why GDP may fail to measure value added in a country.
Firstly, GDP has measurement issues. For example, non-markets (such as home production), or unreported income from self-employment, is not fully captured/accounted for in GDP resulting in the measured GDP being lower than the actual value generated in the country. When value from these “informal sectors” spills over into the formal (measurement of the) economy it will, when considering GDP, look like value has been added to the country when in reality it is only being accounted for correctly.
Further, there are conceptual issues when considering GDP. First of all, GDP does/can not measure the “main freedoms”, such as political freedom, social opportunities, transparency guarantees and protective security. GDP may decline if leisure expands due to reduced market participation, or GDP may rise as result of increasing resource extractions. Also, GDP is based on market prices, which might not always be “right” due to externalities. Lastly, GDP does not account for or give information on income- and wealth- distribution. For instance, a country could have a high GDP, where only a small part of the population benefits from this wealth.
GDP falls under the category ‘economic growth’ as compared to ‘economic development’. And while a rise in GDP yields more economic growth, it doesn’t necessarily also equal a rise in economic development.
- Briefly explain the difference between exchange rate conversion and PPP conversion of GDP.
The exchange rate conversion does not account for purchasing power. By using exchange rate conversion a country’s GDP is measurable in another country’s currency, but this does not account for the actual purchasing power, since the exchange rate itself is a broad measure across markets and goods. For example, while traveling it may seem that many places are cheaper than Denmark. However the purchasing power parity (PPP) helps clarify the “real” value of money in different economies. The PPP considers what number of currency units it takes to purchase an amount of goods and services equivalent to what can be bought with one unit of currency in the base economy.
PPPs are calculated based on the price of a common basket of goods and services in each country/economy, and are a measure of what an economy’s local currency can buy in another economy. The PPP is calculated by using prices of comparable and representative goods and services and the expenditure weights.
- Using the information in PRLB Table 2-1, use Indian prices to calculate GDP for US and India in PPP Rupees. Comment on the result relative to using US prices and
USD to using US prices and
USD.
1) Market exchange rate (RS to USD): sæt priser for tilsvarende goder ift hinanden.
1000usd/50000RS <=> 1RS = 0,02USD
2) US GDP converted into RS, using the exchange rate:
240 bn USD/0,02 = 12000 bn RS.
3) US GDP calculated using RS prices for each product and applying that to US quantities:
Steel: 200 mil * 50000RS = 10000 bn RS.
Retail sales: 2 mil*60000RS = 120 bn RS.
US GDP in RS: 10000 bn. RS + 120 bn. RS = 10120 bn RS.
4) Ratio of PPP calculation of US official exhcange rate:
10120 bn. RS/12000 bn RS = 0,84.
Interpretation: One unit of RS can buy less goods in USD relative to if the goods were purchased in India. –> Indian currency (RS) has lower PPP than US currency (US$)
(se tabel i noter)
- Based on the growth rates presented in Table 2-3. How many years would it take
for the average country in each region to double its GDP per capita if it grew as
recorded in the 2000s?
T_2=log(2)/log(a)
, where a = 1 + the yearly growth rate.
Example:
High income:
T_2=log(2)/log(a) =log(2)/(log(1,013))=53,6 years to double GDP per capita
(se tabel i slides)
- Explain the so-called Easterlin paradox
The Easterlin paradox relates to a tendency in high income nations where people didn’t seem any happier although per capita incomes in the economies had increased. Easterlin based this conclusion on survey data taken over time where he asked how happy people were with their lives.
This contributes to the question of whether GDP and GNI are useful measures for economic well-being.
- Explain briefly whether the Washington Consensus was consistently grounded in
economic theory or should more be considered as a policy paradigm.
The Washington Consensus (WC) was not consistently grounded in economic theory and should be more considered as a policy paradigm. The prescriptions of the WC did not emerge from a record of what had been shown to work, it was more just based on basic economic theory (neoclassical economy). In general the WC was focused on the market. Further, the prescriptions were presented as a valid for countries at all stages of development, that means a one-size-fits-all kind of policy, that did not take individual country specific needs and characteristics intro account.
- Outline the six common elements of sustained growth experiences, and highlight
which channel was under-emphasized in the Washington Consensus strategy.
The six common elements of sustained growth experiences are:
1. macroeconomic stability
2. high levels of investment and saving
3. good leadership and governance
4. success in exploiting the international market for technology/knowledge (facilitating the environments for spillovers)
5. diversified outward orientation –> good at creating comparative advantages and advancing economic complexity
6. allowing the market to play a role in resource allocation –> the role of the “right” incentives.
The WC strategy under emphasized the knowledge transfers and the channel through which they work, as well as comparative advantages, hence the exploration of international market for tech/knowledge.
Further, WC lacked to acknowledge that structural change is not a side effect of economic growth but more a key element in the growth dynamic. This could be linked to the WC underemphasizing the role of macroeconomic stability and investment in public institutions.
