Cole Grundy

6 of 20: The GDP Edition

There were six wrong questions on the quiz. Reanswering six wrong questions:

The Gardener in the GDP

Which of these is applicable to GDP?

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

Yes, the gross domestic product by the official expenditure counting method is

 government spending \(+\) consumers \(+\) investements \(+\) exports \(-\) imports

The bill for the gardener’s cost of service is in the the GDP, but wages derived from it are not. Even with the same value, the gardener’s wage is not the market value of the gardening service.

What the service was sold for is the component for GDP.

The final price of the addition to the author’s property is the more correct answer.

Real Rate, Negatively Inflated

The deposit of \(\$1\,000\) has become \(\$1\,055\) with interest,

and there was a decrease to \(196\) from \(200\) in the government’s consumer price index.

What are the real, nominal, and inflation rates?

  • real rate is \(3.5\%\)
  • real rate is \(7.5\%\) ✓

The nominal interest rate that is paid by the bank pays \(5.5\%\). The real rate is what the money actually earns in the context of the economy.

The real rate is the nominal rate less the inflation:

\[7.5\% = 5.5\% - (-2\%)\]

To get inflation, divide the historical difference of two CPIs by the earlier one:

\[{196 - 200 \over 200} • 100 = -2\%\]

Deflation occurred, so the inflation rate is negative. Inflation subtracts from purchasing power in the usual use of the formula. Here, the double negative means that the bank’s nominal rate of \(5.5\%\) pays an unusual \(7.5\%\).


The manufacturer buys \(\$2\,400\) in materials to produce \(1\,000\) units, which each are valued at \(\$5\).

After \(700\) units are sold, what is this economy’s GDP?

  • \(\$3\,500\)
  • \(\$5\,000\) ✓

GDP measures production. The final market value of the fishcakes is \(5 • 1\,000\), not \(5 • 700\).

The factor of production for \(\$2\,400\) is not counted.

New Bikes

Harley sold \(100\) bikes from last year’s inventory. Which part of GDP is affected?

  • investment
  • no effect ✓

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

Typical Tropical Island Example

An island has a GDP deflator of \(300\), a population of \(30\,000\), and a nominal GDP of \(\$600\,000\,000\).

What is its real GDP?

  • \(\$2\,000\,000\)
  • \(\$200\,000\,000\) ✓

The calculation for a deflator is \[deflator = {nominalGDP \over realGDP} • 100 \]

and so if its deflator is \(300\), the island’s real GDP is surely \(\$200\,000\,000\):

\[300 = {600\,000\,000 \over realGDP} • 100 \]

It’s important to recall that the deflator is like \(100\) in the base year, not like \(1\).

Word to the Wise

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