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Development Economics: Measuring development and poverty · Income and Purchasing Power

How economists measure national income, why GDP and GNI differ, why purchasing power parity matters, and what income figures miss.

Development Economics · 23 questions

Try 3 questions

1. A country hosts many foreign-owned factories whose profits are sent abroad. Which measure of its income is likely higher?

  1. GDP is higher than GNI
  2. GDP and GNI are always equal
  3. GNI is higher than GDP
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Answer: GDP is higher than GNI

GDP counts everything produced inside the borders, while GNI subtracts income paid out to foreign owners and adds income residents earn abroad.

2. Country A's GDP is ten times Country B's, but A has twenty times as many people. How does A's GDP per person compare?

  1. About ten times B's
  2. About double B's
  3. About half of B's
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Answer: About half of B's

GDP per person is GDP divided by population: ten times the output shared among twenty times the people leaves each person about half as much.

3. Why do economists often compare incomes across countries using purchasing power parity rather than market exchange rates?

  1. Local prices differ greatly between countries
  2. PPP rates are set by each central bank
  3. Market exchange rates change only once a year
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Answer: Local prices differ greatly between countries

The same amount of money buys far more housing, food and services in some countries than others, and PPP corrects for those price differences.

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