Chapter 2 Answer

NSS Exploring Economics 5
Chapter 2
Measurement of economic performance (II) other national income

statistics and the general price level
Questions
p.40
Think it over
1.
Which place has a higher living standard? Why?
2.
Where do you want to live? Why?
p.42
Discuss
2.1
Refer to the example in Table 2.1.
a. Explain why the nominal GDP in 2010 is larger than the nominal GDP in 2004. Discuss
using their formulae.
b. Explain why the real GDP in 2010 is the same as the real GDP in 2004. Discuss using
their formulae.
c. Explain why the nominal GDP in 2010 is larger than the real GDP in 2010. Discuss
using their formulae.
p.44
Test yourself
2.1
When GDP increases with population, must per capita GDP increase too? Why?

Questions and Answers to Exercises (Chapter 2)
Pearson Education Asia Limited 2010
p.44
Test yourself
2.2
The following table shows the statistical data of an economy.
Components
$ million
Private consumption expenditure
300
Government consumption expenditure
150
Net domestic fixed capital formation
200
Decrease in stock
120
Depreciation
50
Net exports
300
Subsidies
120
a.
b.
c.
Find its GDP.

If the GDP at factor cost is $580 million, what is the amount of indirect taxes?
If the population is 100,000, what is the per capita nominal GDP?
p.45
Test yourself
2.3
a. In the years shown in Table 2.2, which one is larger, GDP at current factor cost or GDP
at current market prices? Suggest the condition leading to the phenomenon.
b. In the years shown in Table 2.2, which one is larger, GDP at current market prices or
GDP in chained (2008) dollars? Suggest the condition leading to the phenomenon.
c. Calculate Hong Kongs population in 2008.
p.49
Fig 2.6
In which of the above situations would the majority have a higher living standard?
p. 53
Test yourself
2.4
What kinds of households are not covered by the above CPIs?

p. 56
Discuss
2.2
According to Table 2.5, can we conclude that food, electricity, gas, water, alcoholic drinks
and tobacco belong to inferior goods (demand and income are negatively related)? Can we
conclude that clothing, footwear, transport, durable goods and miscellaneous services belong
to superior goods (demand and income are positively related)? Why?
pp.62-63
Exercises
Multiple Choice Questions
1.
Real GDP will be larger than nominal GDP when
A. the GDP deflator increases.
B. the GDP deflator decreases.
C. the GDP deflator is larger than 100.
D. the GDP deflator is smaller than 100.
2.
GDP at factor cost is equal to
A. GDP at market prices plus net income from abroad.
B. GDP at market prices less depreciation.
C. the sum of the value-added of all resident producing units in a specified period.
D. the sum of the value of production of all resident producing units in a specified period.
3*.
When GDP increases,
A. per capita GDP may decrease.
B. per capita GDP increases.
C. per capita GDP increases only if population decreases.
D. per capita GDP increases only if population increases.
4.
Per capita real GDP is NOT a good indicator of economic welfare because
A. GDP only counts the values of all final products, not the values of all transactions.
B. the effect of population changes is neglected.
C. the effect of price changes is neglected.
D. the composition of output is not considered.

5*.
GDP underestimates economic welfare because
A. the values of past inventories, second-hand goods and intermediate products are not
counted in GDP.
B. the value of unpaid household services for self-consumption is neglected.
C. the values of illegal production and unreported production are not counted in GDP.
D. detrimental effects of production are neglected.
6.
Which of the following statements about the CPIs in Hong Kong is INCORRECT?
A. CPI (A) reflects the price level of consumer goods and services generally purchased by
the lower income group.
B. CPI (B) reflects the price level of consumer goods and services generally purchased by
the medium income group.
C. CPI (C) reflects the price level of consumer goods and services generally purchased by
the higher income group.
D. Composite CPI reflects the price level of consumer goods and services generally
purchased by all households.
7.
The implicit price deflator of GDP is
A a figure showing the percentage change in GDP.
B. a figure showing the percentage change in the general price level.
C. a ratio of nominal GDP to real GDP times 100.
D. a ratio of nominal GDP to the price index times 100.
8*.
Which of the following descriptions of the CPI and the GDP deflator is INCORRECT?
A. Their values in the base year are set at 100.
B. The CPI reflects the price level of consumer goods while the GDP deflator reflects the
price level of producer goods.
C. In Hong Kong, both the CPI and the GDP deflator are compiled by the Census and
Statistics Department.
D. Both cannot reflect changes in product quality.

9*.
Study the following information about an economy
Year
Nominal GDP ($ million)
Real GDP ($ million)
2009
2010
240,000
300,000
300,000
333,333
What is the growth rate of the GDP deflator of the economy in 2010?
A. 11.1%
B. 12.5%
C. 18.5%
D. 25%
10*.
Suppose the growth rates of nominal GDP, real GDP and per capita real GDP of a country
were -2%, +5% and +3%, respectively in 2010. Then in 2010, the general price level
has
and the population has
.
A. increasedincreased
B. increaseddecreased
C. decreasedincreased
D. decreaseddecreased
Short Questions
1.
a. Under what condition(s) would real GDP be smaller than nominal GDP?
b. Under what condition(s) would GDP be smaller than potential GDP?
(3 marks)
(3 marks)
2.
Country A has a larger GDP than Country B but people in Country A prefer to live in Country
B. Suggest FOUR possible reasons.
(8 marks)
3.
Give ONE similarity and ONE difference between the consumer price index and the GDP
deflator.
(4 marks)

4.
a. Given that
GDP deflator =
Nominal GDP
100
Real GDP
Write down the relation among the following growth rates growth rate of nominal GDP,
growth rate of real GDP, and growth rate of GDP deflator.
(3 marks)
b. Suppose the real GDP and the GDP deflator increase by 5% and 8%, respectively. Find the
growth rate of nominal GDP. Does nominal GDP increase, decrease or remain unchanged
in that period?
(3 marks)
Structured Question
Nominal GDP
Real GDP
Population
Value
$4,000 million
$3,600 million
10,000
Growth rate
10%
8%
1%
a. Find the values of the GDP deflator, per capita nominal GDP and per capita real GDP.
(6 marks)
b. Calculate the growth rates of the three statistics in (a).
(6 marks)
c. What information is needed to find the GDP at factor cost?
(2 marks)
p.64
Activities
1.
Data analysis:
a. Collect the GDP figures of two countries which you are familiar with.
b. Explain why the living standard of people in the lower income country may be
underestimated.
c. Among the national income statistics you have learned in Chapters 1 and 2 of this book,

which one is a better indicator of their economic welfare?
2.
Visit the following website:
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita
a. According to the per capita GDPs reported, which three territories have the greatest per
capita GDPs? Which three have the lowest?
b. Find out the per capita GDPs of the following territories and rank them in descending
order. Which territories per capita GDPs are higher than that of Hong Kong?
The mainland of China
United States
Japan
Russia
Taiwan
United Kingdom
Korea
India
Hong Kong
France
Singapore
Brazil
Macau
Germany
Canada
Australia
3.
Visit the following website:
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(real)_growth_rate
a. According to the real GDP growth rates reported, which three territories have the highest
growth rates? Which three have the lowest?
b. Find out the real GDP growth rates of the following territories and rank them in descending
order. Which territories growth rates are higher than that of Hong Kong?
United States
Japan
Russia
Taiwan
United Kingdom
Korea
India

Hong Kong
France
Singapore
Brazil
Macau
Germany
Canada
Australia
Answers
p.4 0
Think it over
1.
Hong Kong. Although GDP of the mainland of China was higher than that of Hong Kong in
2008, Chinas population is also much larger than that of Hong Kong. If we divide the GDP
of these two economies by their respective populations, we find that GDP per head in the
mainland of China (US$3,259) was much more lower than that in Hong Kong (US$30,726).
2.
Free answer. Per capita GDP is only one of the factors for consideration.
p.42
Discuss
2.1
a. Nominal GDP in 2010 is equal to QcPc, while nominal GDP in 2004 was equal to
QbPb. They value outputs of different periods (Qc and Qb) at the prices of their
respective periods (Pc and Pb).
In this special case, quantities of outputs are the same in 2010 and 2004 (Qc = Qb), but
prices of outputs are higher in 2010 than in 2004 (Pc > Pb). Hence, nominal GDP in 2010
(QcPc) is larger than that in 2004 (QbPb).
b. Real GDP in 2010 is equal to QcPb, while real GDP in 2004 was equal to QbPb. They
value outputs of different periods (Qc and Qb) at the same base period prices (Pb).
In this special case, quantities of outputs are the same in both years (Qc = Qb), and they
are valued at the same prices. Hence, real GDP in 2010 is equal to real GDP in 2004.
c. Nominal GDP in 2010 is equal to QcPc, while real GDP in 2010 is equal to QcPb. They
value the same basket of outputs (Qc) at different prices (Pc and Pb).

In this special case, prices are higher in 2010 than in 2004 (Pc > Pb), and nominal GDP in
2010 is larger than real GDP in 2010.
p.44
Test yourself
2.1
Per capita GDP = GDP Population.
Although GDP increases with population, per capita GDP increases only if the percentage
rise in GDP (the numerator) is larger than the percentage rise in population (the
denominator). If the percentage rise in the numerator is equal to (smaller than) the percentage
rise in the denominator, the per capita GDP will remain unchanged (decrease).
2.2
a. GDP = C + I + G + NX
= $[300 + (200 + 50 120) + 150 + 300] million
= $880 million
b.
GDP at market prices = GDP at factor cost + Indirect taxes Subsidies

$880 million = $580 million + Indirect taxes $120 million
Indirect taxes = $(880 580 + 120) million = $420 million
c.
Per capita nominal GDP

= Nominal GDP Population
= $880 million 100,000 = $8,800
p.45
Test yourself
2.3
a. GDP at current market prices was larger than GDP at current factor cost in all four years.
This happened because the amounts of indirect taxes were larger than the amounts of
subsidies in all four years.
b. GDP at current market prices was smaller than GDP in chained (2008) dollars in 1980
and 1990 but the former were larger than and equal to the latter in 2000 and 2008,
respectively. This implies that price levels in 1980 and 1990 were smaller than price
levels in 2008 but price levels in 2000 and 2008 were larger and the same, respectively.

c.
Per capita GDP in chained
=
(2008) dollars in 2008
GDP in chained (2008) dollars in 2008

Population in 2008
$240,096 =
$1,675,315,000,000
Population in 2008
Population in 2008 = 6,977,689

p.49
Fig 2.6
The situation represented by the figure on the left hand side
2
0
0
8
p.53
Test yourself
2.4
Households with average monthly household expenditures below $4,000 or above $59,999
(during Oct 2004 Sept 2005) are not covered by the above CPIs. These households are
in the lowest or highest expenditure ranges and account for around 10% of all households.
Also excluded are households receiving Comprehensive Social Security Assistance.
P.56
Discuss 2.2
Expenditure weight of a good =
Expenditure on the good (P Q)

Total expenditure
Assume that income and households total expenditure are positively related. When income
increases, households total expenditure increases. According to Table 2.5, expenditure
weights of food, electricity, gas, water, alcoholic drinks and tobacco decrease from CPI (A) to
CPI (C). A decrease in expenditure weight may occur because
the percentage increase in expenditure on the good is smaller than the percentage increase in
total expenditure;
the expenditure on the good remains unchanged;
the expenditure on the good decreases.
While total expenditure increases with income, the decrease in expenditure weight may be
10
2
02
00
80
8
accompanied by an increase, no change or a decrease in the quantity consumed of the good.

Thus, we cannot conclude whether the good is a superior good or an inferior good.
On the other hand, according to Table 2.5, when households total expenditure increases,
expenditure weights of clothing, footwear, transport, durable goods and miscellaneous
services increase. An increase in expenditure weight implies that the percentage increase in
expenditure on the good is larger than the percentage increase in total expenditure. However,
households in the higher expenditure range usually buy goods of better quality and at higher
prices. While total expenditure increases with income, an increase in expenditure weight may
be accompanied by an increase, no change or a decrease in the quantity consumed of the
good. Thus, we also cannot conclude whether the good is a superior good or an inferior good.
pp.62-63
Exercises
Multiple Choice Questions
1. D
The GDP deflator is obtained by the following formula:
GDP deflator =
Nominal GDP
Nominal GDP
Real GDP
Real GDP
=
100
GDP deflator
100
Real GDP will be larger than nominal GDP, when the GDP deflator is smaller than 100.
2.
3.
Option A is the answer. This happens when the percentage increase in population is
larger than the percentage increase in GDP.
Options B, C and D are incorrect. When GDP increases, per capita GDP will increase
under the following conditions:
the population increases by a smaller percentage than GDP;
the population remains unchanged;
the population decreases.
4.
D
Option A is not the answer. GDP is not equal to the sum of values of all transactions
because some outputs would be double counted and some are not currently produced by

11
resident producing units. However, this does not explain why per capita real GDP is not
a good indicator of economic welfare.
Options B and C are not the answer. They are considered in per capita real GDP.
5.
B
Option A is not the answer. If they are counted, errors occur because some products are
not currently produced and some cause double counting.
Option C is incorrect. Their values are estimated by statistics departments and counted
in GDP.
Option D is not the answer. When the detrimental effects of production are neglected,
GDP overestimates economic welfare.
6.
D
The Composite CPI reflects the price level of consumer goods and services generally
purchased by around 90% of all households.
7.
C
Option B is incorrect. This is a figure showing the general price level in the current
period relative to that in the base period, instead of the percentage change in the general
price level.
8.
Option B is the answer. The CPI shows the price level of consumer goods and services
generally purchased by domestic households, not the price level of all consumer goods.
Some consumer goods may be for export and some are only consumed by domestic
households not covered by the CPIs. The GDP deflator shows the price level of products
related to GDP (or related to consumption, investment, exports and imports), which
include both consumer goods and producer goods.

12
9.
B
GDP deflator in 2010
Nominal GDP in 2010 100

Real GDP in 2010
$300,000 million
$333,333 million
GDP deflator in 2009 =
$240,000 million
$300,000 million
The growth rate =
Nominal GDP in 2009

Real GDP in 2009
100 = 90
100
$
100 = 80
GDP deflator in 2010 GDP deflator in 2009
100%
GDP deflator in 2009

90 80
100%
80
= 12.5%
10. C
GDP deflator =
Nominal GDP
Real GDP
GDP deflator (1 + a) =
100
Nominal GDP (1 + b)
Real GDP (1 + c)
100
where a, b and c are the respective growth rates of the GDP deflator, nominal GDP and
real GDP.
1 +a=
[1 + (-2%) ]
1 + 5%
a
-2% 5% = -7%
Hence, the general price level has decreased.

Per capita real GDP
Real GDP
Population
Per capita real GDP (1 + d) =

Real GDP (1 + c)
Population (1 + e)
13
where d and e are the respective growth rates of per capita real GDP and the
population.
1 + 5%
1 + 3% = 1 + e
5% e
3%
5% 3% = 2%
e
Hence, the population has increased.
Short Questions
1 a.
The GDP deflator is obtained by the following formula:
GDP deflator =
Nominal GDP
Real GDP
Nominal GDP
Real GDP
=
100 (1 mark)
GDP deflator
100
The condition for real GDP to be smaller than nominal GDP is if 100 is smaller than the GDP
deflator, or the GDP deflator is larger than 100. (2 marks)
1 b.
Potential GDP of a country or territory is the GDP when all its resources are used efficiently.
(1 mark)
Hence, GDP is smaller than potential GDP when some resources are idle or used inefficiently.
(2 marks)
2.
People in Country A prefer to live in Country B because people in Country B can enjoy a
higher living standard than people in Country A. The following are some possible reasons:
Relative to Country A,
Country B has a larger value of unpaid services that are not counted in GDP.
Country B has a larger value of unreported production and non-marketed production that is
underestimated.
14
people in Country B have more leisure time.

Country B suffers fewer undesirable effects of production.
Country B has a smaller population.
Country B has a larger proportion of private and public consumption in its GDP.
Country B has more even income distribution.
the currency of Country B is undervalued.
(Any FOUR possible reasons. 2 marks each.)
3.
Similarity:
Both are price indices that show the price level of a basket of goods and services in a
specified period relative to that in the base period. (2 marks)
Differences:
The CPI shows the price level of products generally purchased by (domestic) households,
while the GDP deflator shows the price level of products related to GDP (i.e., related to
consumption, investment, exports and imports).
The CPI better reflects households cost of living, while the GDP deflator better reflects the
overall price level and the purchasing power of money.
The CPI compares the price level of a fixed basket of products in different periods using
fixed weights, while the GDP deflator compares the price level of a currently produced
basket of products in different periods using variable weights.
(Any ONE with elaboration. 2 marks.)
4 a.
The GDP deflator can be obtained by the following formula:
GDP deflator =
Nominal GDP
Real GDP
100
Nominal GDP (1 + b)
Real GDP (1 + c)
100 (1 mark)
where a, b and c are the respective growth rates of the GDP deflator, nominal GDP and
real GDP.
1+b
1+a=
1+c
a
b c (I mark)
15
In other words, the growth rate of the GDP deflator is approximately equal to the difference
between the growth rates of nominal GDP and real GDP. (1 mark)
4 b.
bc
a
b 5%
8%
8% + 5% = 13% (1 mark)
b
The growth rate of nominal GDP is about 13%. In other words, nominal GDP increases.
(2 marks)
Structured Question
a.
Based on the information provided, we can obtain the values of the variables from their
respective formula as follow:
GDP deflator =
Nominal GDP
Real GDP
100 =
$4,000 million
$3.600 million
Per capita nominal GDP =
Nominal GDP
Population
111 (2 marks)
Real GDP
Per capita real GDP
Population

16
$4,000 million
10,000
100
$400,000 (2 marks)
$3,600 million
=
10,000
_
_
=
_ $360,000 (2 marks)
_
_
_
_
_
_
_
b.
GDP deflator =
Nominal GDP
Real GDP
100 (1)
Nominal GDP (1 + 10%)

100 (2)
Real GDP (1 + 8%)
where a is the growth rate of GDP deflator.

Cancelling (1) from both sides of (2).
1 + a = (1 + 10%) (1 + 8%) = 1.019
a = 1.9% (2 marks)
Per capita nominal GDP =
Nominal GDP
(3)
Population
Nominal GDP (1 + 10%)
Per capita nominal GDP (1 + b) =
(4)
Population (1 + 1%)
where b is the growth rate of per capita nominal GDP.
1 + b = (1 + 10%) (1 + 1%) = 1.089
b = 8.9% (2 marks)
Per capita real GDP =
Real GDP
(5)
Population
Per capita real GDP (1 + c) =
Real GDP (1 + 8%)

Population (1 + 1%)
(6)
where c is the growth rate of per capita real GDP.

1 + c = (1 + 8%) (1 + 1%) = 1.069
c = 6.9% (2 marks)

17
Alternatively, we can use the formula derived in Extension corner 3 to calculate the growth
rates.
Growth rate of GDP deflator

Growth rate of nominal GDP Growth rate of real GDP
= 10% 8% = 2% (2 marks)
Growth rate of nominal GDP Growth rate of population
Growth rate of per capita nominal GDP
= 10% 1% = 9% (2 marks)
Growth rate of real GDP Growth rate of population
Growth rate of per capita real GDP
= 8% 1% = 7% (2 marks)
c. GDP at factor cost = GDP at market prices Indirect taxes + Subsidies
To find the GDP at factor cost, the values of indirect taxes and subsidies are needed. (2
marks)
p.64
Activities
1 b.
Possible reasons why GDP may underestimate the living standard include:
values of some unpaid services are excluded from the calculation of GDP;
value of leisure is not counted in GDP;
population size of the lower income country is smaller;
consumption expenditure of the lower income country is larger;
income of the lower income country is more evenly distributed;
currency value of the lower income country is undervalued.
1 c.
Purchasing power parity per capita consumption expenditure is a better indicator. Since PPP
exchange rates equalise the purchasing power of different currencies for a given basket of
goods and services, this indicator allows us to compare the living standard in different
countries or territories by eliminating the distortion of currency values and differences in
price levels of different countries or territories. Furthermore, this indicator also considers the
population size and the composition of output.

18
2 a.
According to the World Economic Outlook Database October 2009, IMF, the three
territories which have the greatest per capita GDP are Luxembourg, Norway and Qatar (
). On the other hand, the three territories which have the lowest per capita GDP are Liberia
(), Burundi () and the Democratic Republic of Congo ().
2 b.
According to the World Economic Outlook Database October 2009, the territories (except
Macau) ranked in descending order according to their per capita GDP are as follows:
Country / territory
Per Capita GDP (US$)
United States
46,443
France
42,091
Australia
41,982
Japan
39,573
Germany
39,442
Canada
39,217
United Kingdom
35,728
Singapore
34,346
Hong Kong
29,559
Korea
16,450
Taiwan
15,373
Russia
8,874
Brazil
7,737
3,566
India
1,033
Macau
(Data not available)
3. a.
According to estimates by the World Factbook, CIA in 2009, the three territories which have
the highest growth rates are Macau (2008 estimates), Anguilla () and Qatar ().
In contrast, the three territories which have the lowest growth rates are Armenia (
), Lithuania () and Latvia.

19
3 b.
According to estimates by the World Factbook, CIA in 2009, the territories ranked in
descending order according to their real growth rates are as follows:
Country / territory
Real growth rate (%)
Macau
13.2 (By CIA World Factbook 2008)
8.7
India
6.5
Australia
0.8
Brazil
0.1
Korea
-0.8
France
-2.1
Canada
-2.4
United States
-2.4
Singapore
-2.6
Hong Kong
-3.1
Taiwan
-4.0
United Kingdom
-4.3
Germany
-5.0
Japan
-5.7
Russia
-7.9

20

Chapter 2 Answer

Enviado por

Dados do documento

Descrição original:

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Chapter 2 Answer

Enviado por

Direitos autorais:

Formatos disponíveis

NSS Exploring Economics 5

Measurement of economic performance (II) other national income

NSS Exploring Economics 5

Pearson Education Asia Limited 2010

Private consumption expenditure

Government consumption expenditure

Net domestic fixed capital formation

Find its GDP.

NSS Exploring Economics 5

Pearson Education Asia Limited 2010

Pearson Education Asia Limited 2010

D. the composition of output is not considered.

NSS Exploring Economics 5

Pearson Education Asia Limited 2010

Nominal GDP ($ million)

Real GDP ($ million)

NSS Exploring Economics 5

Pearson Education Asia Limited 2010

NSS Exploring Economics 5

Pearson Education Asia Limited 2010

which one is a better indicator of their economic welfare?

NSS Exploring Economics 5

Pearson Education Asia Limited 2010

NSS Exploring Economics 5

Pearson Education Asia Limited 2010

GDP at market prices = GDP at factor cost + Indirect taxes Subsidies

Per capita nominal GDP

NSS Exploring Economics 5

Pearson Education Asia Limited 2010

GDP in chained (2008) dollars in 2008

Population in 2008 = 6,977,689

Expenditure weight of a good =

Expenditure on the good (P Q)

Pearson Education Asia Limited 2010

accompanied by an increase, no change or a decrease in the quantity consumed of the good.

NSS Exploring Economics 5

Pearson Education Asia Limited 2010

NSS Exploring Economics 5

Pearson Education Asia Limited 2010

Nominal GDP in 2010 100

GDP deflator in 2009 =

The growth rate =

Nominal GDP in 2009

GDP deflator in 2010 GDP deflator in 2009

GDP deflator in 2009

Hence, the general price level has decreased.

Per capita real GDP (1 + d) =

Pearson Education Asia Limited 2010

Hence, the population has increased.

Pearson Education Asia Limited 2010

people in Country B have more leisure time.

Pearson Education Asia Limited 2010

Per capita nominal GDP =

NSS Exploring Economics 5

Pearson Education Asia Limited 2010

Nominal GDP (1 + 10%)

where a is the growth rate of GDP deflator.

Per capita nominal GDP (1 + b) =

Per capita real GDP =

Per capita real GDP (1 + c) =

Real GDP (1 + 8%)

where c is the growth rate of per capita real GDP.