Cole Grundy

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A reinterpretation of the six (wrong) questions:

The Gardener in the GDP

Which is applicable to GDP?

  • the wage you pay your gardener
  • the new addition to your house ✓

This is GDP by the official expenditure method of counting, which is the sum of:

  • government
  • consumers
  • investements
  • impex

The bill for the gardener's cost of service is part of GDP. The gardener's wages are not counted using the spending approach. Only what the service was sold for is counted by the spending approach. The question allows for "wage" as an answer, which specifically is incorrect.

The final market price of the new addition is the more correct answer.

Real Rate, Negatively Inflated

My deposit of $1,000 has become $1,055 with the interest from the bank. In this same year, the CPI decreased to 196 from 200. What are the real, nominal, and inflation rates?

  • real rate is 3.5%
  • real rate is 7.5% ✓

The nominal interest rate that the bank pays is 5.5%. The real rate, or the realized value of the interest, can be added to the inflation rate to produce the nominal rate.

To get the inflation rate, divide the difference of two CPI values by the earlier CPI value. Here, dividing (200 - 196) / 200 is inflation of -2%: deflation, because CPI decreased.

The real rate is the nominal rate less inflation, so the real rate here is 7.5%:

7.5% = 5.5% - (-2%)

The interest rate's double negative means it is added to the nominal rate, not subtracted like it is in the usual use of the formula.

In an economy with -2% inflation, the bank's nominal rate of 5.5% pays 7.5%.

Fish Cakes

The supplier buys $2,400 in materials to produce 1,000 units, which are valued $5 each. The supplier sells 700 units. What is the GDP of this economy?

  • $3,500
  • $5,000 ✓

The final market value of the inventory is $5 * 1,000.

The New Bikes

Harley sells 100 bikes from last year's inventory. Which term of GDP is affected?

  • investment
  • no effect ✓

Last year's investment in bikes does not affect this year's GDP.

Typical Tropical Island

A Caribbean island's population is 30,000, its GDP deflator is 300, and its nominal GDP is $600mm. What is the real GDP?

  • $20mm
  • $200mm ✓

The price deflator is nominal / real (* 100).

This deflator is 300, so 300 = (600mm / real) * 100.

600 nominal / 200 real = 3, but the deflator calls it 300.

Word to the Wise

“We include only the value of the bread sold in the store.”