Question

Your uncle has a statement from Bigdeal Investments Inc. showing that he earned eight-percent interest last year. If inflation was three percent last year, show the math to tell how well his investment really performed. Why is GDP expressed in real dollars? Why should you want to know the rate of inflation when appraising your recent raise in salary?

Answer 1

Total interest earned =8 %

Inflation rate = 3 %

Real Earning from investment = 8 - 3

= 5 %

GDP expressed in real dollar depicts actual rise in production of goods and services. It does not show rise in GDP which might be mere reflection of rise in price level.

Real GDP does not include rise price level. Thus, actual figures come before us.

Increase in salary can be appraised correctly if we are given inflation rate. Inflation reduces value of money and its purchasing power. Real salary will increase if increase in salary is greater than the prevailing inflation rate.

thus, inflation rate is required to correctly judge or appraise salary.