Principles Final Formulas

Opportunity Cost

What you give up of next best alternative

Slope of Budget Constraint

−Px / Py

Budget Constraint

PxX + PyY = I

Maximum X intercept

I / Px

Maximum Y intercept

I / Py

Terms of Trade Inequality

OC₁ < Terms of Trade < OC₂

Comparative Advantage

Lower opportunity cost

Value of Good Ratio

Pa / Pb

GDP Expenditure Formula

Y = C + I + G + (X − M)

GDP per Capita

GDP / Population

Nominal GDP

Σ(P × Q) using current prices

Real GDP

Σ(P × Q) using base-year prices

GDP Deflator Formula

(Nominal GDP / Real GDP) × 100

Inflation from GDP Deflator/ CPI
Growth in GDP

(New − Old) / Old

Consumer Price Index (CPI)

(Cost of basket this year / Cost of basket base year) × 100

Purchasing Power Parity (PPP)

Income / Bundle Price

Implicit Growth Formula

Yₜ = Y₀(1 + g)ⁿ

Implicit Growth Rate

g = (Yₜ / Y₀)^(1/n) − 1

Aggregate Production Function

Y = A × f(K, H)

Human Capital Breakdown

H = L × h

Labor Force Participation Rate

Labor Force / Population

Unemployment Rate

Number Unemployed / Labor Force

Real Wage

W / P

Fisher Equation

r = i − π

Real Interest Rate Definition

r = nominal rate − inflation

Quantity Theory of Money

gM − gY = π

Money Supply Identity

M × V = P × Y

Bank Equity

Assets − Liabilities

Federal Funds Rate

Price of reserves

Multiplier Formula

1 / (1 − MPC)

Government Spending Multiplier

ΔY = Multiplier × ΔG

Tax Multiplier

−MPC / (1 − MPC)

Crowding Out Effect

ΔI < ΔG

Px

Price of good X

Py

Price of good Y

X

Quantity of good X

Y

Quantity of good Y

I

Income

Pa

Price of good A

Pb

Price of good B

C

Consumption spending by households

I (Investment)

Spending on physical capital by firms and households

G

Government spending on goods and services

X (Exports)

Goods and services sold abroad

M (Imports)

Goods and services bought from abroad

P

Price level

Q

Quantity produced

Y (GDP)

Total output / income of the economy

Y₀

Initial GDP

Yₜ

Future GDP

g

Growth rate

n

Number of periods (years)

A

Technology level

K

Physical capital

H

Human capital

L

Labor force

h

Skill or education level per worker

W

Nominal wage

r

Real interest rate

i

Nominal interest rate

π (pi)

Inflation rate

M

Money supply

V

Velocity of money

MPC

Marginal propensity to consume

ΔY

Change in GDP

ΔG

Change in government spending

Assets

What a bank owns

Liabilities

What a bank owes