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The Accounting Identity for GDP
GDP = C + I + G + (X - M), where C = Consumption, I = Investment, G = Government Spending, and (X - M) = Net Exports.
Components of GDP
The four main components of GDP are Consumption, Investment, Government Spending, and Net Exports (Exports - Imports).
Calculating Real GDP
Real GDP = Year 1 Quantity × Base Year Price; measures the value of goods and services adjusted for inflation.
Calculating Nominal GDP
Nominal GDP = Price × Quantity (sum of all final goods and services produced in a given year without adjusting for inflation).
Inflation Rate Calculations
Inflation Rate = [(CPI in current year - CPI in previous year) / CPI in previous year] × 100%.
Quantity Theory of Money
MV = PQ, where M = Money supply, V = Velocity of money, P = Price level, and Q = Output (Real GDP). It explains the relationship between money supply and inflation.
Costs of Inflation
The costs of inflation include menu costs (cost of changing prices), shoe leather costs (extra time spent managing cash), and loss of purchasing power.
Types of Unemployment
Frictional Unemployment: Temporary unemployment due to job searching. 2. Structural Unemployment: Mismatch between workers' skills and job requirements. 3. Cyclical Unemployment: Caused by economic downturns.
Employment / Unemployment Rate Changes and Factors
The unemployment rate is influenced by economic growth, job creation, labor force participation, and technological changes.
Shifts in the Demand Curve
The demand curve shifts due to changes in income, consumer preferences, price of substitutes/complements, expectations, and population size.
Shifts in the Supply Curve
The supply curve shifts due to changes in production costs, technology, number of sellers, taxes/subsidies, and expectations of future prices.
Present Value Formula
PV = FV / (1 + r)^n, where PV = Present Value, FV = Future Value, r = interest rate, and n = number of periods.
Credit and Interest Rate
Credit is the ability to borrow money, and the interest rate is the cost of borrowing or the return on savings.
Bank Fundamentals
Banks operate by accepting deposits, making loans, and earning interest rate spreads while maintaining reserves for withdrawals.
Federal Reserve System
The central banking system of the U.S., which regulates banks, controls the money supply, and sets interest rates.
Monetary Policy
The Federal Reserve's actions to control money supply and interest rates to influence economic activity (e.g., open market operations, discount rate changes).
Fiscal Policy
Government policy involving taxation and government spending to influence economic conditions.
Word Problems
Applied economic questions that require calculations and analysis of economic concepts.
Bank Runs
When a large number of depositors withdraw their funds simultaneously due to fear of bank failure.
Types of Firms and What They Do
Sole Proprietorship: Single owner, unlimited liability. 2. Partnership: Owned by two or more people, shared liability. 3. Corporation: A separate legal entity, limited liability.
Financial Regulation
Government laws and policies that oversee financial institutions to ensure stability and prevent fraud.
Trade Deficit
Occurs when a country's imports exceed its exports, leading to a negative balance.
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