3. 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 fall of communism, 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.

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 family or village group. Official GDP estimates for these countries are often extremely low, perhaps just a few hundred dollars per person per year. 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?