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Chapter 19: Problem 5

Ireland is one of the few countries where GDP and GNP differ significantly. Using GDP per person, Ireland has the third-highest income per person in Europe. An article on the Financial Times website stated, "With GDP being about 20 percent larger than GNP, Irish people appear (when using GDP per person) to be richer than what they feel they are." Briefly explain the author's reasoning.

Short Answer

Expert verified
The author's reasoning is that using GDP per person to measure average income in Ireland gives an inflated picture of wealth. Since a portion of Ireland's GDP is produced by entities not benefiting Irish residents, the actual economic prosperity of Irish people is better reflected by GNP per person, which is lower than the GDP per person. Thus, Irish people might 'feel' less affluent than GDP statistics suggest.

Step by step solution

01

Understand the difference between GDP and GNP

GDP refers to the total value of all goods and services produced within a country during one year. GNP, on the other hand, is the total value of all goods and services produced by the residents of a country, regardless of where the production takes place. If a country's GDP is larger than its GNP, it means that more goods and services are produced within the country than are produced by its residents elsewhere.
02

Apply concept to Ireland's situation

In Ireland, the GDP is about 20% larger than the GNP. This means that a significant portion of the goods and services produced within Ireland are produced by entities (like foreign corporations) that do not primarily benefit the Irish residents. For example, if a foreign company operates in Ireland and sends its profits back to its home country, this production contributes to Ireland's GDP but not its GNP.
03

Understanding the author's reasoning

When citizens or economists try to measure a nation's wealth, they could rely on either GDP or GNP. Given that the Irish GDP is bigger than its GNP, the use of GDP to calculate average income will result in a higher figure. However, this doesn't fully reflect the actual economic condition of the average Irish person. As a result, Irish people may appear richer in statistics (when GDP per person is used) than they feel because the GNP per person – which might reflect their circumstances better – is lower.

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Most popular questions from this chapter

Which component of GDP will be affected by each of the following transactions involving the Ford Motor Company? If you believe that a transaction will affect none of the components of GDP, briefly explain why. a. You purchase a new Ford Escape hybrid from a Ford dealer. b. You purchase a 2013 Ford Escape hybrid from a friend. c. Ford purchases door handles for the Escape from an auto parts manufacturer in Indiana. d. Ford produces 1,000 Escapes in a factory in Missouri and ships them to a car dealer in Shanghai, China. e. Ford purchases new machine tools to use in its Missouri Escape factory. f. The state of Missouri builds a new highway to help improve access to the Ford Escape plant.

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Michael Burda of Humboldt University in Germany and Daniel Hamermesh of the University of Texas examined how workers in the United States who lost their jobs spent their time. They discovered that during the period when the workers were unemployed, the decline in the number of hours of paid work they did was almost the same as the increase in the number of hours they devoted to household production. Do Burda and Hamermesh's findings allow us to draw any conclusions about whether total production in the economy-whether that production is included in GDP or not \(-\) decreased when these workers became unemployed? Does your answer depend on whether the household production they carried out while unemployed were activities, such as childcare, that the workers had been paying other people to perform before they lost their jobs? Briefly explain.

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next? How does the U.S. Bureau of Economic Analysis deal with this drawback?

An article in the Economist stated, "The appeal of GDP is that it offers, or seems to, a summary statistic of how well an economy is doing." a. In what sense does GDP offer a summary statistic of how well an economy is doing? b. Why qualify the statement about GDP as a summary statistic by including the phrase "or seems to"?
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