The entire economy of the small, rural community of Balaclava consists of an accountant and two farms. The accountant does the books for both farms and gets paid $100 each for his services. The corn farm annually sells $200 worth of corn to the market and delivers another $300 worth to the dairy farm which is used as cattle feed. The dairy farm sells $500 of milk each year at the market.
a) Explain the difference between nominal and real GDP. [3 points]
b) Explain why GDP refers to ‘final goods’ [3 points]
c) Calculate the GDP of Balaclava using both the final goods methods and the value added approach.