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Difficulty: MediumReal vs Nominal National Income and Per Capita Income

In a given economy, Nominal Gross Domestic Product (GDP) increased from ₦800 billion\text{₦}800\text{ billion} in Year 1 to ₦1,200 billion\text{₦}1,200\text{ billion} in Year 2. Over the same period, the GDP deflator rose from 100100 to 150150, while the total population grew from 40 million40\text{ million} to 50 million50\text{ million}. What was the percentage change in the country's real per capita income between Year 1 and Year 2?

  1. It decreased by 20%Answer
  2. B
    It increased by 50%
  3. C
    It remained unchanged
  4. D
    It increased by 20%

Answer

The real per capita income decreased by 20%.
Real GDP in Year 1 was ₦800 billion\text{₦}800\text{ billion} and in Year 2 was also ₦800 billion\text{₦}800\text{ billion} (₦1,200 billion/1.5\text{₦}1,200\text{ billion} / 1.5). Dividing Real GDP by the respective population figures yields ₦20,000\text{₦}20,000 in Year 1 and ₦16,000\text{₦}16,000 in Year 2. The change from ₦20,000\text{₦}20,000 to ₦16,000\text{₦}16,000 represents a 20%20\% decrease.

Step-by-Step Solution

1
Calculate Real GDP for Year 1 and Year 2
Real GDP (Year 1) = ₦800 billion100/100=₦800 billion\frac{\text{₦}800\text{ billion}}{100 / 100} = \text{₦}800\text{ billion}. Real GDP (Year 2) = ₦1,200 billion150/100=₦800 billion\frac{\text{₦}1,200\text{ billion}}{150 / 100} = \text{₦}800\text{ billion}.
Real GDP measures physical output by removing the effect of price changes using the GDP deflator.
2
Calculate Real Per Capita Income for both years
Real Per Capita Income (Year 1) = ₦800 billion40 million=₦20,000\frac{\text{₦}800\text{ billion}}{40\text{ million}} = \text{₦}20,000. Real Per Capita Income (Year 2) = ₦800 billion50 million=₦16,000\frac{\text{₦}800\text{ billion}}{50\text{ million}} = \text{₦}16,000.
Real per capita income is obtained by dividing Real GDP by total population.
3
Calculate the percentage change in real per capita income
Percentage Change = 16,000−20,00020,000×100%=−4,00020,000×100%=−20%\frac{16,000 - 20,000}{20,000} \times 100\% = \frac{-4,000}{20,000} \times 100\% = -20\%.
The percentage change formula compares the difference relative to the initial value.

Key Concept

Real vs Nominal National Income and Per Capita Income
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Real vs Nominal National Income and Per Capita Income

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