Macro Econ GDP & CPI

The Business Cycle

The short-run fluctuation between economic growth (expansion) and economic decline (contraction).

Phases of the Business Cycle

Expansion, Contraction, Recession

Expansion

Economy grows, output & employment increase

Contraction

Economy shrinks, output & employment fall

Recession

At least two consecutive quarters of economic contraction

GDP

Measures total income earned in a country and total spending on goods/services

Expenditure approach formula

GDP = Consumption + Investment + Government spending + (exports - imports)

Expenditure Approach

Adds all spending on final goods & services

Income Approach

Adds all incomes (wages, rent, interest, profit).

Value-Added Approach

Adds the value created at each stage of production

What’s included in GDP

Final goods & services, market value of legal goods, newly produced goods

Nominal GDP

Measures output using current prices (inflation is included)

Real GDP

Measures output using constant prices (Adjusted for inflation)

GDP Deflator Formula

Nominal GDP / Real GDP * 100

Nominal V. Real GDP

Nominal GDP rises due to higher prices or more production whereas real GDP only rises if more goods/services are produced.

CPI

Measures overall price level for goods/services bought by consumers