ECON 102 - Macroeconomics - Unit 1

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a given period of time

Components of the GDP

1. Consumption (C)

2. Investment (I)

3. Government Purchases (G)

4. Net Exports (NX)

Equation of the GDP

Y = C + I+G+NX

Net Exports

Exports - Imports

Consumption

Spending by households on goods and services with the exception of purchases of new housing

Investment

Spending on business capital, residential capital, and inventories

Government Purchasing

Spending on goods and services by local, state, and federal governments

Nominal GDP

the production of goods and services valued at current prices

Real GDP

the production of goods and services valued at constant prices

GDP deflator

Measure of the price level calculated as the ratio of nominal GDP to real GDP, used to adjust for inflation. Measures the current level of prices relative to the level of prices in the base year

Equation for GDP deflator

GDP \ Deflator = \frac {Nominal \ GDP}{Real \ GDP}*100

Inflation

A situation in which the economy’s overall price level is rising

Equation for Inflation

Inflation \ in \ year \ 2 = \frac{GDP \ deflator\ in\ year\ 2-GDP\ deflator\ in\ year\ 1}{GDP\ deflator\ in \ year\ 1}*100

Exclusions of GDP

Leisure

Value outside markets

Environmental quality

Income distribution

Gross National Product (GNP)

measure of the total income earned by nationals in a given period of time.

Equation for GNP

GNP = GDP + factor payments from abroad - factor payments to abroad

Consumer Price Index (CPI)

Measure of the overall cost of goods and services bought by a typical consumer

Bureau of Labor Statistics (BLS)

Government agency that computes and reports CPI

5 Step Process to calculate CPI

1. Determine the basket of goods.

2. Find the prices of the goods.

3. Calculate the cost of the basket.

4. Choose a base year.

5. Calculate the CPI using the formula.

Equation for Consumer Price Index

Consumer\ Price\ Index = \frac{Price\ of\ basket\ in\ current\ year}{Price\ of\ basket\ in\ base\ year}*100

Inflation Rate

Percentage change in the price index from the preceding period

Equation for Inflation Rate

Inflation\ rate\\_2=\frac{CPI\\_2-CPI_1}{CPI\\_1}*100

Core CPI

Measure of the overall cost of consumer goods and services excluding food and energy

Producer Price Index

Measure of the cost of a basket of goods and services bought by firms

Problems with the CPI

• Substitution Bias

• Introduction of New Goods

• Unmeasured Quality Change

Equation for dollar figures from different times

Amount\ in\ today's\ \$ = Amount\ in\ year\ T's\ \$*\frac{Price\ level\ today}{Price\ level\ in\ year\ T}

Indexation

Automatic correction by law or contract of a dollar amount for the effects of inflation

Real Interest Rate

Interest rate corrected for the effects of inflation

Nominal Interest Rate

Interest rate as usually reported without a correction for the effects of inflation

Equation for real interest rate

Real\ Interest\ Rate = Nominal\ Interest\ Rate-Inflation\ Rate