The University of the South Pacific

Faculty of Business and Economics

School of Economics
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EC304: ECONOMIC GROWTH AND DEVELOPMENT SEMESTER 1, 2018
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Tutorial 2 Answer guide

1. The following table lists information useful for calculating GDP in New Zealand and Papua New Guinea
(PNG).

Papua New Guinea: Manufacturers Services Agriculture Total Output

Output per worker 200 50 500
Employment (millions) 0.5 1.5 2.5
Aggregate Output 100 75 1250
Market Price (PGK per unit) 7.00 3.00 1.00
Value of Output (PGK) (200*0.5*7)=700 (50*1.5*3)=225 (500*2.5*1)=1250 2175 million
PNG
New Zealand: Manufacturers Services Agriculture
Output per worker 1000 100 4000
Employment (millions) 1.0 1.25 0.75
Aggregate Output 1000 125 3000
Market Price (NZD per unit) 4.00 2.50 0.80
Value of Output (NZD) 4000 312.5 2400 6712.5

The market exchange rate is 1.75 PGK per NZD. Papua New Guinea's total population is 7 million while
New Zealand's is 4 million (including dependents).

(a) After filling in the blank spaces, calculate each country's annual GDP and annual GDP per capita in
units of its own currency.

PNG= 2175/7=310.71 PGK/per capita

NZ = 6712.5/4=1678.13 NZ/per capita

(b) As measured by exchange rates, what is the relative size of New Zealand's GDP per capita compared to
Papua New Guinea's? (Hint: First, compute any of the country’s GDP in terms of another dollar using the
exchange rate)

ER…..1.75PNG =1nz
310.71/1.75=177.55NZ (PNG gdp in nz dollars)
Ratio of NZ gdp per capita compared to PNG
1678.13/177.55=9.45
NZ gdp per capita is 9.45 times higher than PNG gdp per capita.

(b) Calculate the purchasing power parity (PPP) measure of PNG's GDP per-capita in NZD using prices
that prevail in New Zealand. Re-compute the relative size of the two economies using the PPP
comparisons. (Hint: Use the PPP method)

1
 Multiply PNG output with NZ price
Papua New Guinea: Manufacturers Services Agriculture Total Output
Output per worker 200 50 500
Employment (millions) 0.5 1.5 2.5
Aggregate Output 100 75 1250
Market Price (PGK per unit) 4.00 2.50 0.8
Value of Output (PGK) 400 (50*1.5*2.5)=187.5 (500*2.5*.8)=1000 1587.5 million

New Zealand: Manufacturers Services Agriculture

Output per worker 1000 100 4000
Employment (millions) 1.0 1.25 0.75
Aggregate Output 1000 125 3000
Market Price (NZD per unit) 4.00 2.50 0.80
Value of Output (NZD) 4000 312.5 2400 6712.5

PNG gdp per capita in nz price is = 1587.5/7=226.79

Ratio of NZ gdp per capita compared to PNG

1678.13/226.79=7.4
NZ gdp per capita is 7.4 times higher than PNG gdp per capita using PPP method.

(d) Discuss the difference between the exchange rate based conversion and the PPP conversion.

PPP method is better measure of GDP. Goods and services that don’t cross the border are under-valued in
developing countries and over-valued in develop countries under exchange rate method.
However, under PPP method, good and services in both countries are valued at same price.

2) China’s GDP increased from $997.5 billion in 1999 to $1,076.9 billion in 2000. Calculate the growth rate
of China’s GDP in 2000 (this data is from http://www.worldbank.org).

rate of GDP, Yt represents GDP in year t, and Yt+1 represents GDP in year t+1. In this example, $997.5
$1,076.9  $997.5
billion corresponds to Yt and $1,076.9 corresponds to Yt+1. Thus, g   0.0796  8.0% .
$997.5
During the year 2000, China’s GDP grew at a rate of about 8.0%per year.

3) India’s real GDP per capita (PPP) grew at an average annual rate of 2.00% from 1960 through 1996,
increasing from $769 to $1,546. Assuming India’s GDP per capita continues growing at this average rate
from 1996 through 2046, what will India’s real GDP per capita equal in 2046?

If the average growth rate over the fifty year period 1996 through 2046 equals 2.00%, then India’s GDP
per capita in 2046 can be expressed as: Y2046  Y1996(1  g )50 , where Y2046 represents real GDP per capita in
2046, Y1996 represents real GDP per capita in 1996, and g represents the average annual growth rate.
Substituting in the appropriate numbers, Y2046  ($1,546)(1  0.0200) 50  $4,161 , so real GDP per capita
in 2046 (Y2046) is predicted to be $4,161.

2
4) China’s real GDP per capita (PPP, 1985 constant prices) increased from $564 in 1960 to $2,374 in 1996.
Calculate the average annual growth rate of China’s real GDP per capita over the period 1960-1996.

Real GDP per capita in 1960, $564, grew over a 36 year period to $2,374. This can be expressed as:
$2,374  $564(1  g )36 , where g is the average annual growth rate. To solve for g, divide both sides by
1
 $2,374  36
 
1
$2,374
$564:  (1  g ) 36 . Now raise each side of the equation to 1/36:    (1  g )
36 36 1 g
$564  $564 
1
 $2,374  36
. So, g     1  0.0407 . Thus, China’s real GDP per capita grew an average of about 4.1%
 $564 
annually.

Question 5

Fiji
Meaning schooling index Expected schooling index
10.7  0 13.0  0
 0.7133  0.7222
15  0 18.0  0

Education Index Income Index

(0.7133)  (0.7222)  0 log(4145)  log(100)
 0.7178  .6291
0.5626
2 log(75, 000)  log(100)
Health Index HDI
69.2  20 (0.7569 x 0.7178 x 0.5626)1/3 = 0.6736
 0.7569
85  20

Tonga:
Mean schooling Index Expected schooling index
10.3−0 13.7−0
= 0.687 = 0.761
15−0 18−0

Education Index Income Index

(0.687)+(0.761)−0 log(4186)−log(100)
= 0.724 = 0.5641
2 log(75000)−log(100)

Health Index HDI

72.3−20
= 0.8046 (0.8046 x 0.724 x 0.5641)1/3 = 0.6901
85−20