Macroeconomic Formulas and Concepts

Vocabulary flashcards defining fundamental macroeconomic indicators, formulas for GDP, price indexes, inflation adjustments, and opportunity cost.

Gross Domestic Product (GDP) Components Identity

Identified by the equation $Y = C + I + G + NX$

Net Exports (NX)

Calculated as $\text{NX} = \text{exports} - \text{imports}$

Nominal GDP

Calculated as $\text{Nominal } GDP_t = (P_t^1 \times Q_t^1) + (P_t^2 \times Q_t^2)$

Real GDP

Calculated using base year prices as $\text{Real } GDP_t = (P_{\text{base}}^1 \times Q_t^1) + (P_{\text{base}}^2 \times Q_t^2)$

GDP Deflator

A price index calculated as $\text{GDP deflator} = 100 \times \frac{\text{Nominal GDP}}{\text{Real GDP}}$

Consumer Price Index (CPI)

A price index calculated as $\text{CPI} = \left(\frac{\text{Basket's cost in current year}}{\text{Basket's cost in base year}}\right) \times 100$

Inflation Rate

The percentage change in a price index (using GDP Deflator or CPI), calculated as $\text{Inflation rate} = \left(\frac{\text{Price Index this year} - \text{Price Index last year}}{\text{Price Index last year}}\right) \times 100\%$

Converting Past Dollar Amounts to Today's Dollars

Formula used to adjust for inflation: $\text{Amount in today's dollars} = \text{Amount in year } T \text{ dollars} \times \left(\frac{\text{Price level today}}{\text{Price level in year } T}\right)$, where the price level can be CPI or the GDP deflator.

Real Interest Rate

The interest rate adjusted for inflation, calculated as $\text{Real interest rate} = \text{nominal interest rate} - \text{inflation rate}$

Opportunity Cost Calculation

From PPF examples, calculated as $\text{Opportunity cost of one good} = \frac{\text{Units of the other good sacrificed}}{\text{Units of the good gained}}$ (e.g., $\frac{20 \text{ airplanes}}{1000 \text{ tons of soybeans}}$)