3. Economists have tried to measure the GDPs of virtu ally all the world’s nations. This problem asks you to think about some practical issues that arise in that effort.

a. Before the fall of communism, the economies of the Soviet Union and Eastern Europe were cen trally planned. One aspect of central planning is that most prices are set by the government. A gov ernment-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.

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 one another within a kin or vil lage group. Official GDP estimates for these countries

= + where S is national saving, I is investment, and CA is the current account balance. Calculations of national saving and investment depend on the treatment of government investment. In the text, we treated government pur chases, G, as if they were consumption expenditures.

Therefore, Eq. (2.7) states that government saving is

= − − −

S T TR INT G,

( )

so that (1) national sav ing in Eq. (2.8) is

= + − −

S Y NFP C G, and (2) I in Eq. (2.10) is gross private domestic investment GPDI.

As mentioned in the text, a more detailed treat ment recognizes that government purchases com prise consumption expenditures, which we will call GCE, and government investment, which we will call GI, so

= +

G GCE GI. Now define government saving as (

− − −

)

T TR INT GCE. With this alterna tive definition of government saving, show that private saving plus government saving = +

investment ( )

I CA, where I is the sum of GPDI and GI.