Comparing Real Economic Output
An economist wants to compare the real economic output of two countries, Alpha and Beta, which both produce only bread and cars. To do this, she decides to value the output of both countries using the prices from Country Alpha.
Using the data provided below, calculate the total value of output for both Country Alpha and Country Beta using only Country Alpha's prices. Based on your calculation, which country has a larger real economic output?
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Purchasing Power Parity (PPP)
An analyst compares the economic output of two countries, Country X and Country Y. Both countries produce only two goods: widgets and gadgets. The analyst calculates each country's total output value using its own local prices and finds they are identical.
Country Good Quantity Local Price X Widgets 100 $10 X Gadgets 200 $5 Total Value for X $2,000 Y Widgets 80 $15 Y Gadgets 160 $5 Total Value for Y $2,000 Based on this data, the analyst concludes that the real economic output of Country X and Country Y is the same. What is the fundamental flaw in this conclusion?
Comparing Real Economic Output
Comparing Real Economic Output with a Common Price Set
An economist wants to compare the real economic output of two countries, Country A and Country B, which each produce only apples and bananas. To eliminate the effect of different price levels, the economist decides to value the production of both countries using the prices from Country A.
Country Good Quantity Local Price A Apples 100 $1 A Bananas 50 $2 B Apples 120 $2 B Bananas 40 $1 Based on this methodology, what is the calculated real output of Country B?