Saturday, July 30, 2016

Suppose you know that Canada's GDP in 1999 was $900 billion, and Canada's GDP in 1933 was $9 billion. What judgement about the change in the...

You cannot make any judgement about the economic well-being of the average Canadian from these statistics.  It may seem as if you can, but you really cannot without more information.


On its face, it seems as if this means that the average Canadian in 1999 was 100 times better off than he or she was in 1933.  Since GDP measures national income and GDP increased 100-fold in that time, the average Canadian must be 100 times better off, right?  Wrong.  There are two factors that make it so that we cannot say this.


First, there has been a great deal of inflation over the years.  GDP, as opposed to real GDP, does not take inflation into account. As prices rise, GDP rises even if people are not getting any richer in real terms.  To know how much things changed in Canada between 1933 and 1999, we would need to know the overall level of inflation in that period.


Second, Canada’s population has increased greatly since 1933.  GDP tells us only about the size of the overall economy.  To know what this means for the average person, we have to know how many people are in a country.  Therefore, to know how things changed for the average Canadian between 1933 and 1999, we would need to know what the Canadian population was in those two years.


With these two further pieces of information, we could tell something about how the economic well-being of the average Canadian changed over this time.  Without this information, we cannot say anything with any accuracy.

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