Question

The table below shows the real GDP (US$) for two countries in 2019.

Table 2

	Country A	Country B
GDP (constant 2010 US$)	4.6 million	3 million
Population	12,000	8,000
Total hours of employment	80,000	48,000

a) Based on the information provided in Table 2, analyse whether it is correct to assume that productivity and standard of living is higher in country A than country B. Workings has to be shown.                                                                                                                           

b) Generally, most economists agree that increases in money supply growth will increase inflation and that inflation has undesirable consequences. In this context, analyse and explain why hyperinflations persist and what should be done to end hyperinflations?   

                                                                                                                                   

Answer 1

a) Using the above table, standard of living can be calculated by per capita GDP (GDP / population) while productivity will be calculated as value addition of GDP in per hour of employment (GDP / Population)

Per capita GDP in country A = (4.6 * 10^⁶ / 12,000) = 383.33

Per capita GDP in country B = (3 * 10^⁶ / 8,000) = 375

GDP per hour of employment in country A = (4.6 * 10^⁶ / 80,000) = 57.5

GDP per hour of employment in country B = (3 * 10^⁶ / 48,000) = 62.5

As per capita GDP is higher in country A, we can say standard of living is higher in country A but GDP per hour of employment which captures productivity is less in country A. We cannot surely say that standard of living and productivity is higher in country A.

b) Rise in money supply by central banks will raise cash holdings of people which tends to raise their willingness to pay for goods and eventually raise aggregate demand in an economy. Rise in aggregate demand of goods will raise price level of them which result in inflation. Hyperinflation occurs wither due to rise in money supply or demand pull inflation. Factors which can slower the pace of inflation:

• Raise tax which will leave disposable income with consumers to spend on goods
• Raise excess reserves of commercial banks which will lower the pace of rise money supply through multiplier process
• Reduce government spending
• Stop printing money