Economists have tried to measure the GDPs of virtually all the world's nations. This problem asks you to think about some practical issues that arise in that effort.
a. Before the collapse of the Soviet system the economies of the Soviet Union and Eastern Europe were centrally planned. One aspect of central planning is that most prices are set by the government. A government-set price may be too low in that people want to buy more of the good at the fixed price than there are supplies available; or the price may be too high so that large stocks of the good sit unsold on store shelves. During the past several years, central planning has been largely eliminated in Eastern Europe and the former Soviet Union, but government price-setting has not been completely abandoned. For example, Russia still keeps energy prices well below market-clearing levels.
What problem does government control of prices create for economists attempting to measure a country's GDP? Suggest a strategy for dealing with this problem.
b. In very poor agricultural countries, many people grow their own food, make their own clothes, and provide services for each other within a family or village group. Official GDP estimates for these countries are often extremely low, perhaps just a few hundred dollars per person. Some economists have argued that the official GDP figures underestimate these nations' actual GDPs. Why might this be so? Again, can you suggest a strategy for dealing with this measurement problem?