Question

Q1. A business publication recently included an article in which the author, a well-known business owner, defined current nominal Gross Domestic Product as the value of all sales in the economy during the current period. Do you agree with that definition? Explain why or why not.

Q2. An American politician recently said "If inflation is fully anticipated by all parties, the redistributional effects would be almost nothing. It's the fact that some inflation is a surprise that causes there to be winners and losers during an inflationary period." Do you agree with this statement? Is it true that there are no costs of anticipated inflation? Explain the costs associated with expected inflation and the costs associated with unexpected inflation.

Answer 1

Q1) No the definition used by the business publication is wrong. GDP does not include the value of all sales but only the value of all the final goods and services. For instance if X produces steel which is sold to Y for 100 and used by Y to make a car worth 1000, the GDP is just the final car which is consumed = 1000. By the publication's definition, it will be 100 + 1000 = 1100 which is an overestimate. furthermore, GDP only includes the goods and services that are produced within the domestic territories, and imports are excluded. This is not mentioned in the definition.