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Calculating GDP: a) (3 point) Answer if the following statement is true or false and explain: Development accounting, which

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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.

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