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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
Consumption (C)
Investment (I)
Government Purchases (G)
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
Determine the basket of goods.
Find the prices of the goods.
Calculate the cost of the basket.
Choose a base year.
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
