NYJC_H1_ECONS_Q4_suggested_answer

2017 JC2 H1 Econs Prelim Exam Suggested Answers for Question 4 a) Explain how standard of living is measured in an economy. [10] b) Discuss whether an improvement in trade balance will help to achieve a higher standard of living in an economy. [15] Introduction The term Standard of living (SOL) is broad and is usually examined in terms of material SOL and non-material SOL. The material SOL measures the qua ntity and quality of goods and services accruing to each person in the country. The non-mat erial SOL measures the intangibles and focuses on the quality of life. Body – Measuring material SOL Material SOL can be measured using nominal GDP. Nom inal GDP is a national income accounting statistic evaluated at current market pr ices reflects the money value of all goods and services produced within the territory. Such a statistic is also known as " current dollar GDP ". Nominal GDP estimates reflect the money value of all goods and services produced within the territory but have not been adjusted for price changes. Within the year, there could have been actual increases in output or price increases (eg. inflation) or both. Hence in times of inflation, nominal GDP will increase BUT this ma y have no positive impact on the amount of goods and services available overtime because no additional goods may have been produced. The magnitude of the increase in nominal GDP estimates during times of inflation may also be due to higher prices rather than the increase of output. Real GDP on the other hand, measures the money value of all goods and services produced within the territory adjusted for price changes. Hence if there is a rise in real GDP, it is definite that there has been an increase in physical output. More precisely, real GDP per capita or real GNP per capita are used as we try to measure the material standard of living each person has. Real GDP per capita = Real GDP ÷ Population size On average, people in high GDP per capita countries enjoy larger, better-constructed, and more comfortable homes, higher quality food and clothing, a greater variety of entertainment and cultural opportunities, better access to transp ortation and travel and other communications, indicating a higher material standard of living. The Real GDP pc of a country may have increased over time, however it is important to note that the national pie may not be divided equally am ong the population of the country despite the higher Real GDP pc overtime. Hence although mor e goods and services are available, it may not be equally accessible to all. If the increase in national income is accrued to a minority, this does not mean that everyone is better off. Thus it would be correct to say that more goods and services are accessible to the minority only. In this scenario, although the Real GDPpc may be higher, the income is n