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Difficulty: Very hardReal vs Nominal National Income and Per Capita Income

In Period 1, an economy recorded a Nominal GDP of ₦500 billion\text{₦}500\text{ billion}, a GDP deflator of 100100, and a total population of 40 million40\text{ million}. By Period 2, Nominal GDP expanded to ₦750 billion\text{₦}750\text{ billion}, the GDP deflator increased to 125125, and the population grew to 50 million50\text{ million}. What was the percentage change in the country's real per capita income between Period 1 and Period 2?

  1. A decrease of 4%4\%Answer
  2. B
    An increase of 20%20\%
  3. C
    An increase of 50%50\%
  4. D
    A decrease of 10%10\%

Answer

The real per capita income decreased by 4%4\%.
To evaluate changes in standard of living, nominal national income figures must be adjusted for both inflation and population growth. Real GDP in Period 1 was ₦500 billion\text{₦}500\text{ billion}, giving a Real Per Capita Income of ₦12,500\text{₦}12,500. In Period 2, Real GDP was 7501.25=₦600 billion\frac{750}{1.25} = \text{₦}600\text{ billion}, resulting in a Real Per Capita Income of 600 billion50 million=₦12,000\frac{600\text{ billion}}{50\text{ million}} = \text{₦}12,000. The relative change is 12,000−12,50012,500×100%=−4%\frac{12,000 - 12,500}{12,500} \times 100\% = -4\%, representing a 4%4\% decrease.

Step-by-Step Solution

1
Calculate Real GDP for Period 1 and Period 2.
Real GDP in Period 1 = ₦500 billion100/100=₦500 billion\frac{\text{₦}500\text{ billion}}{100 / 100} = \text{₦}500\text{ billion}. Real GDP in Period 2 = ₦750 billion125/100=₦600 billion\frac{\text{₦}750\text{ billion}}{125 / 100} = \text{₦}600\text{ billion}.
Real GDP measures physical output by removing the effect of price level changes using the GDP deflator.
2
Calculate Real Per Capita Income for both periods.
Period 1 Real Per Capita Income = ₦500 billion40 million=₦12,500\frac{\text{₦}500\text{ billion}}{40\text{ million}} = \text{₦}12,500. Period 2 Real Per Capita Income = ₦600 billion50 million=₦12,000\frac{\text{₦}600\text{ billion}}{50\text{ million}} = \text{₦}12,000.
Real Per Capita Income is obtained by dividing Real GDP by the total population.
3
Compute the percentage change in Real Per Capita Income from Period 1 to Period 2.
Percentage Change = 12,000−12,50012,500×100%=−50012,500×100%=−4%\frac{12,000 - 12,500}{12,500} \times 100\% = \frac{-500}{12,500} \times 100\% = -4\%.
A negative change indicates a decrease of 4%4\% in average living standards.

Key Concept

Real GDP and Real Per Capita Income Adjustment
Estimated Time:3m 0s
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Topics

Real vs Nominal National Income and Per Capita Income

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