Question

INSTRUCTIONS TO CANDIDATES Attempt Question ONE and any Other one (1) Question QUESTION ONE 120 Marks! a) Discuss brietly why macroeconomists work with aggregate variahles and explain the arguments they use to defend their position. Do you find these arguments reasonable? [3 b) Justify why GDP per worker should be preferred to GDP per capita in compuring living c) One of the main questions that growth economics addresses is whether poor countries are i) With the aid of appropriate diagrams carefully distinguish between absolute ii) Under what circumstances does absolute convergence imply a decline in the dispersion bl or both non-rival and non- marks ] standards bctwccn countries. [2 marks] likely to catch up with rich ones. If so, we say there is cross-country convergence convergence and conditional convergence? [8 marks] of GDP per capita? [I mark]

Answer 1

a) macro economics as we all know deals with real economic variables like output, employmenyt, national income, government policies, open economy, foreign trade etc. in short we can say macro economist work with aggregate variables because all parts of the economy is equally important to study and each part is related to the other in some way or the other so the aggregate study of the economy is much more practical and essential argued by the economist, which is correct.

b) gdp per capita is a more realistic measure of living standard than gdp because a country may be earning lot from a particular region and there might be areas where people are not having job and no means of income but still as the gdp from one part is so high the total gdp will show a greater number while on the other hand some peolple are nat even able to earn a penny. the gdp per capita shows per head income of people which ultimately drives down the total gdp if only one sector is doing well and the other is not. we get gdp per capita by dividing gdp with total population which is actually the true measure of someones standrd of living.

c) i-absolute converegence is the general convergence which states in the longrun all the countries will converge to the same growth path in terms of gdp . that means countries will converge to the same level of income per worker, capital -labour ratio, ouput per capita and consumption with an equal growth rate. on the other hand conditional convergence states that a countrys income or gdp per capita converges to its own steady state growth path taking into consideration its starting point or its initial capacity. we can say that if a country starts with low gdp per worker it is likely to grow faster than others and vice versa. we can explain it with the help of diagram.

ii) if poorer economies will grow faster than richer economy then the dispersion of gdp percapita will decline in the longrun and countries will converge to one steady state growth path.