Question

Which of the following are included in calculating this year's GDP?

a. Interest received on a security of the U.S. government

b. The purchases of a new automobile

c. The services of a gardener in weeding her garden

d. The purchase of a life insurance poliy

e. The money received by John when he sells his computer to Mary

f. The purchases of new office equipment by the U.S government

g. Unempolyment compensation benefits received by a former autoworker

h. A new apartment building built by a construction firm

i. Travel by people in Canada to the United States to visit Disneyland

Why do economics prefer to compare real GDP figures for different years instead of nominal GDP figures?

Answer 1

a) Interest received on a security of the US government is a factor income generated in the US. Thus, it will be included in the GDP

b) The purchase of new automobile would be included in the GDP.

c) The Service of a gardener weeding her garden is seen as an non-economic activity since it's working on her own garden and receives no payment for this. It won't be included in GDP.

d) The purchase of life insurance policy will be included in the GDP

e) Money received by John will not be included in the GDP. This is because he sells 'his' computer. Thus, this is resale of an old computer. Its value was included in the GDP in the year when the computer was bought brand new. Hence, it won't be included in the GDP

f) The purchase of new office equipment is the purchase of a good in the US. Thus, it will be included in the GDP.

g) Unemployment compensation is a Unilateral Transfer by the government. A Unilateral Transfer is not included in the GDP because it's the payment against which no goods and services are produced. Thus, it won't be included in the GDP.

h) A new apartment building built by a construction firm is residential investment for the firm. Thus, it will be included in the GDP.

i) Travel by the people in the US to visit Disneyland would be included in the GDP because travelling expenses were incurred in US and travelling cost were paid by the Canadians for the travelling service they enjoyed in the US Domestic territory. Thus, it would be included in the GDP.

This is because Nominal GDP are not strictly comparable in the sense that Nominal GDP is sum total of final goods and services valued at the current prices and current prices are different in different years. Thus, current prices may inflate or deflate nominal GDP and thus, the quantity of goods and services produced cannot be compared when using Nominal GDP. Therefore, Real GDP is user by Economists to compare the goods and Services produced in different years which are valued at a base year price(called constant price).