Key Economic Formulas and Concepts

GDP (Expenditure Approach)

GDP = C + I + G + (X - M) (Add consumption, investment, government spending, and net exports.)

GDP (Income Approach)

GDP = W + I + R + P (Add wages, interest, rent, and profits.)

Nominal GDP

Nominal GDP = Price × Quantity (current year) (Measures value of output using current prices.)

Real GDP

Real GDP = (Nominal GDP ÷ GDP Deflator) × 100 (Adjusts for inflation using base year prices.)

GDP Deflator

GDP Deflator = (Nominal GDP ÷ Real GDP) × 100 (Shows how much prices have changed since the base year.)

Price Index (CPI or GDP Deflator)

Price Index = (Cost in Given Year ÷ Cost in Base Year) × 100 (Measures average price level change.)

Inflation Rate

Inflation Rate = ((New Price Index - Old Price Index) ÷ Old Price Index) × 100 (Shows percent change in prices from year to year.)

Unemployment Rate

Unemployment Rate = (Unemployed ÷ Labor Force) × 100 (Percent of labor force without a job.)

Labor Force Participation Rate

LFPR = (Labor Force ÷ Population Age 16+) × 100 (Percent of adults in the labor force.)

Aggregate Demand (AD)

AD = C + I + G + (X - M) (Same formula as GDP by spending approach.)

Spending Multiplier

Multiplier = 1 ÷ (1 - MPC) = 1 ÷ MPS (Shows total change in spending from a small initial change.)

Tax Multiplier

Tax Multiplier = -MPC × Spending Multiplier (Less powerful than the spending multiplier; subtracts impact.)

Money Multiplier

Money Multiplier = 1 ÷ Reserve Requirement (Tells how much money banks can create with reserves.)

Max Change in Money Supply

Change = Money Multiplier × Excess Reserves (How much money can be created in the banking system.)

Real Exchange Rate

Real Exchange Rate = (Nominal Exchange Rate × Domestic Price) ÷ Foreign Price (Adjusts exchange rate for price levels in two countries.)

Balance of Payments Rule

Current Account + Financial Account = 0 (Any trade imbalance must be offset by capital flows.)

Rule of 70

Years to Double = 70 ÷ Growth Rate (Estimates how long it takes to double GDP or any value.)

Natural rate of employment formula

NR=actual- cyclical or (structural=actual-cyclical- frictional) then nr=frictional+ structural