Question

7. Discuss why the nominal GDP per capita is a good measure of a countries economic well being and why it is a poor measure.

a. (5 points) Why is the nominal GDP per capita a good measure?

b. (5 points) Why is the nominal GDP per capita a poor measure?

Answer 1

Nominal GDP is the amount of real GDP after adjusting inflation/deflation.

Nominal GDP = Real GDP + Inflation

Or

Nominal GDP = Real GDP – Deflation

Nominal GDP per capita = Nominal GDP / Number of population of the country

Good measure:

If an economy is stable and doesn’t have much fluctuation as inflation or deflation, nominal GDP per capita is a good measure. It is a good measure, since shows the difference in standard of living between the periods. Suppose nominal GDP in in 2018 was $2,000 million when population was 20 million; nominal GDP becomes $3,500 million when population increases to 22 million in the year 2019.

Nominal GDP per capita in 2018 = $2,000 million / 20 million = $100

Nominal GDP per capita in 2019 = $3,500 million / 22 million = $159

Therefore, the standard of living increases by [(159 – 100) / 100] × 100 = (59 / 100) × 100 = 59%

Bad measure:

If an economy faces higher inflation or deflation, nominal GDP per capita is not a good measure; the good measure would be real GDP per capita.

Suppose in the above case the inflation rate is 20%. Nominal GDP per capita in 2018 would same as real GDP per capita, since the rate of inflation should not be considered in the first year.

Real GDP per capita in 2018 = $2,000 million / 20 million = $100

Real GDP per capita in 2019 = [Nominal GDP / (1 + inflation rate)] / 22 million

                                                = [$3,500 million / (1 + 0.20)] / 22 million

                                                = (3,500 / 1.20) / 22

                                                = 132.58

The standard of living increases by [(132.58 – 100) / 100] × 100 = (32.58 / 100) × 100 = 32.58%.

Therefore, if there is inflation the standard of living increases by 32.58% but not 59%. Nominal GDP per capital is a bad measure here.