Question

Calculating GDP: a) (3 point) Answer if the following statement is true or false and explain: "Development accounting, which is the empirical analysis that uses the production function to explain differences in GDP across countries, finds that differences in capital per capita across countries can explain MOST of the differences in GDP per capita." b) (3 points) The data tells us that GDP per capita in Peru was $6000 in 2015 and it was $5000 in 2010. A student claims that in 5 years Peruvians became 20% richer. Another student is worried because inflation was high in Peru during those years. What do you think? Is this comparison correct or how would you correct, if needed, the comparison of GDPS between these two dates?

Answer 1

a)

It has been suggested by Solow growth model that availability of capital is responsible for differential in GDP. More the per capita availability of capital, higher would be the GDP of country. Developing countries have low level of capital, hence they have lower level of GDP relative to the developed ones.

Thus is right statement.

b)

GDP has increased by 20 %  over the last five years, But this is not correct comparison. it shows only nominal rise in GDP. It does not disclose inflationary pressures, Rise in inflation in peru does not cause 20 % rise in real GDP of country. it is real GDP which is inevitable for rise in real standard of living.

Thus, we should not jump to conclusion that 20 % rise in nominal GDP will cause 20 % rise in standard of living. Standard of living will depend on the productions of goods and services.