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The current president of Frohlandia is running for reelection to the presidency. She claims that during...

The current president of Frohlandia is running for reelection to the presidency. She claims that during his first term the country's citizens have become 25% better off, since the Frohlandian real GDP has increased from $10 billion to $12.5 billion. a. Is her claim true? Is real GDP an exact measure of welfare? Why or why not? Why might her claim be misguided? b. Suppose that the population of Frohlandia has increased from 500,000 to 650,000 during the president's first term.What happened to the Frohlandian standard of living during this time?

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Answer #1

A.

Her claim is not true, because GDP is an aggregate measure and it does not reflect the quality of life at an individual level. GDP is not the measure of welfare, because it is an aggregate and does not reflect the income and resource inequality among the population in the economy. A small percentage of people own the maximum of the income and it does not spread quality of life properly. Further, per capital income is not considered that could tell a better measure. So, if population increased by bigger % than that of the GDP, then the claim will be misguided.

B.

% Increase in population = (650000-500000)/500000 = 30%

% Increase in real GDP = 25%

It means that per capita income has decreased, because growth in population is higher than the growth in real GDP. It will lead to decrease in standard of living.

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