Many Analysts have used nominal GDP to compare output growth of economies. Recently, one of the Analyst concluded that Ghana’s economy in the year 2022 was better than the year 2021 with output levels of 80 bags of Maize and 100 bags of Maize respectively

Let's work through each of the questions step by step. ### 1. Estimate Nominal GDP for 2021 and 2022 Nominal GDP is calculated as the sum of the current prices of goods multiplied by the quantities produced in that year. **Nominal GDP for 2021:** - Quantity of Maize = 100 bags - Price of a bag of Maize in 2021 = 50 \[ \text{Nominal GDP 2021} = 100 \, \text{bags} \times 50 \, \text{(price per bag)} = 5000 \] **Nominal GDP for 2022:** - Quantity of Maize = 80 bags - Price of a bag of Maize in 2022 = 80 \[ \text{Nominal GDP 2022} = 80 \, \text{bags} \times 80 \, \text{(price per bag)} = 6400 \] ### Summary of Nominal GDP - **Nominal GDP 2021:** 5000 - **Nominal GDP 2022:** 6400 ### 2. Estimate Real GDP for 2021 and 2022 using 2020 as the base year price Real GDP is calculated by using the prices from the base year to measure the output in current years. **Base year price (2020):** 40 per bag **Real GDP for 2021:** \[ \text{Real GDP 2021} = 100 \, \text{bags} \times 40 \, \text{(base year price)} = 4000 \] **Real GDP for 2022:** \[ \text{Real GDP 2022} = 80 \, \text{bags} \times 40 \, \text{(base year price)} = 3200 \] ### Summary of Real GDP - **Real GDP 2021:** 4000 - **Real GDP 2022:** 3200 ### 3. Is the Analyst right to have said Ghana’s economy was better in 2022 than 2021? The analyst is **not correct** in stating that Ghana's economy was better in 2022 than in 2021. Though the nominal GDP increased from 5000 in 2021 to 6400 in 2022, the real GDP, which accounts for inflation and reflects the actual quantity produced, decreased from 4000 in 2021 to 3200 in 2022. This indicates a decline in the actual economic output when adjusted for price changes, suggesting that the economic performance worsened. ### 4. Estimate GDP Deflator for 2021 and 2022 The GDP deflator is calculated by dividing nominal GDP by real GDP and multiplying by 100. **GDP Deflator for 2021:** \[ \text{GDP Deflator 2021} = \left( \frac{\text{Nominal GDP 2021}}{\text{Real GDP 2021}} \right) \times 100 = \left( \frac{5000}{4000} \right) \times 100 = 125 \] **GDP Deflator for 2022:** \[ \text{GDP Deflator 2022} = \left( \frac{\text{Nominal GDP 2022}}{\text{Real GDP 2022}} \right) \times 100 = \left( \frac{6400}{3200} \right) \times 100 = 200 \] ### Summary of GDP Deflator - **GDP Deflator 2021:** 125 - **GDP Deflator 2022:** 200 The increasing GDP deflator indicates rising prices in the economy, reflecting inflation and showing that while nominal GDP is increasing, the real economic output is decreasing. ### 5. What is the difference between GDP Deflator and CPI? - **GDP Deflator:** Measures changes in the price level of all domestically produced goods and services (it encompasses all goods and services in the economy). - **Consumer Price Index (CPI):** Measures the average change over time in the prices paid by consumers for a basket of goods and services. It only accounts for goods and services purchased by households, not all goods and services produced. ### 6. In discussing the cost of living, which of these two indices (GDP Deflator and CPI) is better and why? The **CPI** is generally considered better for discussing the cost of living, as it reflects the prices that consumers actually pay for goods and services. It focuses specifically on household expenditures, making it more relevant for understanding the experienced cost of living by average consumers. The GDP deflator is broader and doesn't account for consumer preferences or the composition of consumer goods. ### 7. Explain three problems associated with the use of CPI in determining the cost of living and impliedly welfare. 1. **Substitution Bias:** CPI assumes that consumers maintain a constant basket of goods. If the price of one good rises, consumers may substitute it for a cheaper alternative, but the CPI does not account for this change in consumption patterns. 2. **Quality Changes:** CPI may not fully adjust for changes in product quality. If a product improves significantly while its price increases slightly, the CPI might suggest a higher cost of living without accounting for the increased utility received from the quality improvement. 3. **New Products and Changes in Consumer Preferences:** The CPI often takes time to update its basket of goods. It may not quickly reflect new products or changes in preferences, leading to discrepancies between what consumers actually purchase and what the CPI measures, distorting the real understanding of welfare and living standards.