(a) Nominal GDP and PPP GDP for the U.
S. is the same since the benchmark of calculating both of them is in US $. For example, purchasing goods for $1 in USA will cost $1in that same nation. (b) GDP at PPP exchange rates are different from nominal GDP mainly due to differences between countries in the cost of services.Generally developed countries like China have a higher GDP at market exchange rates than PPP GDP. China has a large number of unskilled or low-skilled workers thus services tend to be much cheaper there. Cheaper services cause the PPP exchange rate in comparison with the market exchange rate lower.
Even though China in the last decades has achieved a considerable degree of economic progress, there is still a significant number of rural workers, providing a cheap labour source to service sectors. This results in prices being lower in China compared with wealthier countries including the United States. (c)There are two possible reasons for this. First of all, China has devalued its currency (RMB) deliberately, thus when we count the nominal GDP, we are using the wrong exchange rate.
The second reason for this can be the fact that things are cheaper in China. As a result China has a higher PPP GDP but not a higher nominal GDP than the Unites States since goods but most importantly services in China are much cheaper than in US. (d) First of all, GDP per capita is measured at market prices thus it ignores externalities. Therefore, even though for US GDP per capita may be higher, more negative externalities are likely to arise and social welfare will decrease as a result in the US. In addition, GDP only includes market transactions. It does not take into account for example, voluntary work which has a positive impact on social welfare since it is based on wholly economic activity.
At the same time GDP does not include any black market transactions that may have a negative impact on the welfare of people and as a result there is an underestimation of GDP. Moreover, GDP does not indicate what is being produced. For example, if many people are sick in the US and healthcare is required, this will increase the GDP of the country, as this would account for economic activity, however this does not concern welfare since it would have been better if people were not sick in the first place. Therefore, the GDP per capita at market exchange rates for China may be about 1/7 of the US nominal GDP per capita however this does not necessarily mean that the welfare of an average Chinese citizen is about 1/7 of the welfare of an average US citizen since there are other reason contributing to a person’s welfare as mentioned above.
(e) GDP per capita can be defined as the measure of the total a country’s economic output (GDP) divided by the number of people in the country. GDP per capita may give a distorted picture of changes in the living standards as a result of economic growth. For example, there are regional variations in income and spending and national data may hide hide those variations in income, employment and in output per capita.
In addition, higher GDP may mean that average (mean) incomes within a country have increased, however inequalities in income and wealth may grow. Thus a higher GDP per capita does necessarily mean that all people are being benefited from economic growth. Therefore, changes in a country’s GDP per capita are inadequate measure of human standards of living. Economists are now pushing for an extra indicator- median household income. Median household income is the income level earned by a given household where half of the homes in the area earn more and half of them earn less. Median is better than the mean since for example if increases to the GDP go solely to the higher income groups this would not increase the measure. Thus, looking at the median focuses more on inclusive growth and provides a more accurate picture of the actual picture of the benefits generated by an increase in the GDP. (f) GDP growth is necessary since it means that the country is experiencing economic growth.
When a country is experiencing economic growth, then this means that welfare is likely to be improved. This is due to the fact that economic growth creates jobs and thus increases the purchasing power so that means that more people are in a position to meet their needs. However, this may not always be the case. For example, the economy may grow but income inequalities may grow as well. This is known as the “paradox of economic growth”.
Thus, the GDP of the economy may be growing but it is distributed only to the rich people, making poorer people worse off. (g)