Quick econ question

[rmorse]

Hey guys,

Quick question...This is from an old Midterm I am glancing over. Unfortunately, the answers are not included.



13. Converting Ghana's GDP and GDP per capita from cedis to dollars using market exchange rates

a. overvalues the value non-traded good and services
b. means that the volume of GDP will be understated.
c. is the most common way to evaluate living standards.
d. all of the above





I am fairly certain it is not c (and therefore, d)

However, I am stuck on a and b. If the non-traded goods and services never hit the market, won't they not be included in the GDP anyway? So, I am leaning towards "b".


Let me know what you guys think

 

[cassharper]

I think it's B)

It's been a long time since I've taken any economics class but I think it has to do with the devalued monetary unit in proportion with the volume of trade.

 

[Onion01]

it's B

 

[ewurm]

If you consider the fact that Ghana is a developing country, I think the answer is D.

Calculations using current exchange rates reflect not only the differences in the quantities of
goods and services produced in the countries concerned, but also the differences in price levels
between countries. Shifts in exchange rates consequently have a direct influence on results:
countries may appear suddenly to become “richer” or “poorer”, when in reality there has been no
change in the quantities of goods and services produced. For example, exchange rates may
suddenly go up or down by 10% or more because of market forces or official fiat whereas real
output has remained unchanged. These distortions are most pronounced in developing countries
where currency markets are subject to government control. On 12 January 1994, the 14 countries
of the African Financial Community (whose currencies are tied to the French franc) devalued
their currencies by 50%. This move, of course, did not cut the real output of these countries by
half, although their U.S. dollar estimates of GDP did not fall by 50%.

http://rds.yahoo.com/_ylt=A0geu8wxj...3/**http://www.csulb.edu/~syamarik/12ho1c.pdf

 

[ewurm]

Also read the Penn effect:

http://en.wikipedia.org/wiki/Penn_effect

 

[Ullopincrate]

I think C. You are using an exchange rate so many cedis = so many dollars and that makes it easier to compare living standards. Example: look what you can buy in Mexico with dollars. however converting pesos to dollars doesn't change the value of the peso or the dollar.

Of course a lot of tests like the "all of the above" answers.

 

[cassharper]

someone should throw in an A) so he's really confused

 

[rmorse]

If you consider the fact that Ghana is a developing country, I think the answer is D.

Calculations using current exchange rates reflect not only the differences in the quantities of
goods and services produced in the countries concerned, but also the differences in price levels
between countries. Shifts in exchange rates consequently have a direct influence on results:
countries may appear suddenly to become “richer” or “poorer”, when in reality there has been no
change in the quantities of goods and services produced. For example, exchange rates may
suddenly go up or down by 10% or more because of market forces or official fiat whereas real
output has remained unchanged. These distortions are most pronounced in developing countries
where currency markets are subject to government control. On 12 January 1994, the 14 countries
of the African Financial Community (whose currencies are tied to the French franc) devalued
their currencies by 50%. This move, of course, did not cut the real output of these countries by
half, although their U.S. dollar estimates of GDP did not fall by 50%.

http://rds.yahoo.com/_ylt=A0geu8wxjblJ68MA6ohXNyoA;_ylu=X3oDMTBybnZlZnRlBHNlYwNzcgRwb3MDMQRjb2xvA2FjMgR2dGlkAw--/SIG=11tvp0811/EXP=1236983473/**http%3a//www.csulb.edu/~syamarik/12ho1c.pdf

Very good info, but C is still throwing me off. You don't use exchange rates to look at standard of living, you use PPP's/price indexes, since exchange rate is fluctuating on a daily basis, yet standard of living isn't.

I think C. You are using an exchange rate so many cedis = so many dollars and that makes it easier to compare living standards. Example: look what you can buy in Mexico with dollars. however converting pesos to dollars doesn't change the value of the peso or the dollar.

Of course a lot of tests like the "all of the above" answers.

"Look at what you can buy in Mexico." Now you are looking at price indexes, which is completely different then exchange rate. Example: A haircut costs 5 pesos in Mexico, and 5 dollars in USA. You can get 2 pesos for a dollar. However, a coke costs 1 peso in Mexico, and 2 dollars in USA.


While the value is still the same (A peso or a dollar), a Dollar converted to a Peso goes much farther (in this hypothetical scenario) then a Peso converted to a Dollar.

someone should throw in an A) so he's really confused

We have a love/hate relationship, you and I.