Three-approach GDP · Value added · Real/Nominal · CPI vs Deflator · Practice — Mankiw Ch.1–2
GDP component categorizer
For each transaction, click the correct GDP component. Modeled on Mankiw 10e Ch.2 Q4 — the most-tested topic on Exam 1.
Rule of thumb: Who is buying the good or service?
Household → C (Consumption)
Firm (capital good or inventory) → I (Investment)
Government → G (Government purchases)
Foreign buyer → X (Export), so NX rises
Imported good purchased in U.S. → C or I rises AND M rises (so NX falls) — they offset for the foreign portion
Click your answer for each transaction
Your score
0/10
Categorization accuracy
Value-added supply chain builder
Build a multi-stage supply chain. The tool computes value added at each stage and verifies the sum equals the final good's price.
Default scenario — bread chain
Stage
What they do
Sells for ($)
Input cost ($)
Value added ($)
Sum of value added
$6.00
Final-good GDP
$6.00
✓ The sum of value added equals the final good's price — no double counting.
Try these:
Reset to bread. Note $1 + $2 + $3 = $6 (the engineer's bread).
Change the baker's sale price to $10 (and keep input cost $3). Watch value-added and GDP both rise to $10.
Add a 4th stage: "Sandwich shop" buys bread for $6, sells sandwich for $12. New GDP = $12.
Real GDP, Nominal GDP, GDP deflator, and CPI — calculator
A two-good economy. Change quantities and prices; see all four measures recomputed instantly.
Data — set base year = 2024
Good
2024 (base year)
2026
Qty
Price ($)
Qty
Price ($)
Hot dogs
Hamburgers
Output measures
Nominal GDP 2024
$1,000
Nominal GDP 2026
$3,000
Real GDP 2024 (base)
$1,000
Real GDP 2026 (2024 prices)
$2,000
Real growth 2024 → 2026
+100.0%
Price measures
GDP deflator 2024
100
GDP deflator 2026
150.0
CPI 2024
100
CPI 2026 (fixed 2024 basket)
160.0
Deflator inflation
+50.0%
CPI inflation
+60.0%
Why are they different?
CPI uses the FIXED 2024 basket, so it weights hot dogs and burgers as 200 each. GDP deflator uses the CURRENT 2026 basket
(250 hot dogs, 500 burgers). When relative prices change and consumers substitute, CPI misses the substitution and overstates
the cost-of-living increase.
CPI vs. GDP deflator — substitution experiment
Move the slider to control how much consumers substitute when relative prices shift. Watch CPI overstate the cost-of-living change.
The experiment
Base year 2024: two goods at $10 and $10, quantities 100 and 100 each.
In 2026, good A doubles to $20; good B stays at $10. Consumers shift toward the cheaper good.
50%
0% = no substitution (consumers buy the same basket). 100% = full substitution (consumers buy only good B).
Quantities in 2026
Good A (now $20)
50
Good B (still $10)
150
Price indices
CPI 2026 (fixed 2024 basket)
150.0
GDP deflator 2026 (current basket)
125.0
CPI inflation
+50.0%
Deflator inflation
+25.0%
CPI overstatement
+25.0 pp
Key finding: The MORE consumers substitute toward the cheaper good, the BIGGER the gap between CPI and GDP deflator.
CPI (Laspeyres) overstates inflation by this gap. The Boskin Commission (1996) estimated that the U.S. CPI overstates true inflation by about 1.1 percentage points per year because of this substitution bias.
Practice quiz — Section 1 v3
10 questions in Practice Exam 1 style. Instant feedback on each answer.