If one is interested in the volume of production within the boundaries of a

If one is interested in the volume of production

This preview shows page 1 - 2 out of 2 pages.

If one is interested in the volume of production within the boundaries of a country, real GDP should be used. If, on the other hand, one is interested in the economic welfare of the residents of a country, real GNI is more appropriate. There is, however a technical complication which has to be borne in mind when the growth rates of real GDP and real GNI are calculated or interpreted.
Image of page 1
The problem stems from the fact that GDP includes exports and excludes imports. When real GDP is estimated, changes in export prices are therefore taken into account but changes in import prices are effectively ignored (since imports do not form part of GDP). Real movements in export prices and import prices are important. These relative movements are captured in the terms of trade , which are calculated as the ratio between export prices and import prices. A massive increase in the gold price will leave real GDP unaffected, ceteris paribus, while a sharp rise in the oil price will also have no effect on real GDP, ceteris paribus .
Image of page 2

You've reached the end of your free preview.

Want to read both pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture