ReviewEcon AP Macro Formulas Cheat Sheet (From Total Review Booklet)

Macro Formulas Cheat Sheet

GDP Formulas

• Expenditures Approach:
  

  GDP = C + Ig + G + (X - M)

  • Where:

  • C = Consumption

  • Ig = Gross Investment

  • G = Government Spending

  • (X - M) = Exports – Imports

• Income Approach:
  

  GDP = Wages + Rents + Interest + Profits

  • Note: This formula does not need to be memorized.

  • It includes some adjustments to the above components.

Growth Formulas

• Productivity: Productivity = \frac{Real \text{ GDP}}{Hours \text{ Worked}}

  • This measures how much output can be produced for every hour worked.

• Net Investment: Net \text{ Investment} = Gross \text{ Investment} - Depreciation

  • Positive net investment:

  • Causes economic growth

  • Shifts the Production Possibility Curve (PPC) outward and Long-Run Aggregate Supply (LRAS) to the right

  • Negative net investment:

  • Shifts PPC inward and LRAS to the left

Inflation Formulas

• Inflation:
  

  Inflation=Nominal\%\Delta-\operatorname{Re}al\%\Delta

• Real % Change:
  \operatorname{Re}al\%\Delta=Nominal\%\Delta-Inflation

• Consumer Price Index (CPI):
  

  CPI = \frac{Current \text{ Market Basket Value}}{Base \text{ Market Basket Value}} \times 100

• Deflator:
  

  Deflator = \frac{Nominal \text{ GDP}}{Real \text{ GDP}} \times 100

• Inflation Rate:
  

  Inflation \text{ rate} = \frac{Current \text{ CPI} - Previous \text{ CPI}}{Previous \text{ CPI}} \times 100

• Real Value:
  

  Real \text{ value} = \frac{Nominal \text{ Value}}{CPI} \times 100

GDP Multiplier Formulas

• Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS):
  

  MPC = 1 - MPS or\frac{\Delta Consumption}{\Delta Income}
  

  MPS = 1 - MPC or\frac{\Delta Savings}{\Delta Income}

• Spending Multiplier:
  

  Spending \text{ Multiplier} = \frac{1}{MPS}

• Tax Multiplier: Tax \text{ Multiplier} = - \frac{MPC}{MPS}

  • Note: It is one less than the spending multiplier.

• Balanced Budget Multiplier:

  • Equals 1

Banking Formulas

• Money Multiplier:
  

  Money \text{ Multiplier} = \frac{1}{Reserve \text{ Requirement}}

• Maximum Checkable Deposit Creation:
  

  Maximum \text{ Checkable Deposit Creation} = Excess \text{ Reserves} \times Money \text{ Multiplier}

• Quantity of Money Theory: Nominal \text{ GDP} = M \times V = P \times Y

  • Where:

  • M = Money Supply

  • V = Velocity of Money

  • P = Price Level

  • Y = Real GDP

Foreign Exchange Formulas

• Balance of Payments:
  

  Current \text{ Account} + Financial \text{ and Capital Account} = 0

• Current Account:

  • Composed of:

  • Balance on trade

  • Foreign Factor Income: Profits from Foreign Investments

  • Foreign Transfers

• Financial and Capital Account:

  • Consists of purchases of foreign assets (including bonds, businesses, land, loans, currency).

• Trade Deficit:

  • Occurs when exports (X) are less than imports (M)

Comparative Advantage Formulas

• Absolute Advantage:

  • An entity has an absolute advantage if it can produce more units with the same amount of inputs or produce the same amount with fewer inputs.

• Comparative Advantage:

  • An entity has a comparative advantage if it can produce a good or service at a lower opportunity cost.

  • Outputs (bikes, corn, etc.):

  • Opportunity cost of A = B/A units of B

  • Inputs (hours, machines, land):

  • Opportunity cost of A = A/B units of B

Interest Rate Formulas (Fisher Equation)

• Real Interest Rate:
  

  Real \text{ interest rate} = Nominal \text{ interest rate} - Inflation \text{ rate}

• Nominal Interest Rate:
  

  Nominal \text{ interest rate} = Real \text{ interest rate} + Inflation \text{ rate}

• Inflation Rate:
  

  Inflation \text{ rate} = Nominal \text{ interest rate} - Real \text{ interest rate}

Wage Change Formulas

• Change in Real Wage:
  

  Change \text{ in Real Wage} = Change \text{ in Nominal Wage} - Inflation

• Change in Nominal Wage:
  

  Change \text{ in Nominal Wage} = Change \text{ in Real Wage} + Inflation

New Market Basket Value

• Base Market Basket Value:

  • Used to calculate Nominal GDP, Real GDP, and Index values

• Value Adjustments:

  • Nominal GDP, Real GDP, New Index, and Base Index

Changes in Economic Metrics

• Change in Consumption:

  • Can be calculated using values of income and savings

• MPC and MPS Relation:

  • MPC + MPS = 1

Labor Force Formulas

• Labor Force Definition: Labor \text{ Force} = Unemployed + Employed

  • Note: Must be actively looking for work to be classified as unemployed

• Labor Force Participation Rate:
  

  Labor \text{ Force Participation Rate} = \frac{Labor \text{ Force}}{Civilian \text{ Population}} \times 100

• Unemployment Rate:
  

  Unemployment \text{ Rate} = \frac{Unemployed}{Labor \text{ Force}} \times 100

• Natural Rate of Unemployment:

  • The rate of unemployment when cyclical unemployment is zero.

  • Comprised of Frictional Unemployment + Structural Unemployment