AP Macroeconomics

AP Macroeconomics – Test Notes (Full Sheet)

I. GDP (Gross Domestic Product)

Definition

  • Total market value of all final goods and services produced within a country in a given time period.

II. Two Ways to Calculate GDP

1⃣ Expenditure Approach

GDP=C+I+G+Xn\boxed{GDP = C + I + G + X_n}GDP=C+I+G+Xn​​

  • C (Consumption): Household spending

  • I (Investment): Business spending, new homes

  • G (Government Spending): Government purchases

  • Xₙ (Net Exports): Exports − Imports

❌ Excludes: transfer payments, stocks/bonds, used goods

2⃣ Income Approach

GDP=Total Income Earned\boxed{GDP = \text{Total Income Earned}}GDP=Total Income Earned​

Includes:

  • Wages

  • Rent

  • Interest

  • Profit

Key idea: Every dollar spent is a dollar earned.

III. Nominal vs. Real GDP

  • Nominal GDP: Measured with current prices (inflation included)

  • Real GDP: Adjusted for inflation → best measure of growth

IV. GDP Deflator

Formula

GDP Deflator=Nominal GDPReal GDP×100\boxed{\text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100}GDP Deflator=Real GDPNominal GDP​×100​

Rearranged

Real GDP=Nominal GDPDeflator×100\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Deflator}} \times 100Real GDP=DeflatorNominal GDP​×100

V. Real GDP (“Old Prices” Method)

  • Multiply current quantities by base-year prices

  • Removes inflation

VI. Inflation

Definition

  • Increase in the overall price level → reduces purchasing power

VII. Consumer Price Index (CPI)

Formula

CPI=Cost of Market Basket TodayCost of Basket in Base Year×100\boxed{\text{CPI} = \frac{\text{Cost of Market Basket Today}}{\text{Cost of Basket in Base Year}} \times 100}CPI=Cost of Basket in Base YearCost of Market Basket Today​×100​

  • Base year CPI = 100

VIII. Inflation Rate (Using CPI)

Inflation Rate=CPInew−CPIoldCPIold×100\boxed{\text{Inflation Rate} = \frac{\text{CPI}_{\text{new}} - \text{CPI}_{\text{old}}}{\text{CPI}_{\text{old}}} \times 100}Inflation Rate=CPIold​CPInew​−CPIold​​×100​

IX. Nominal vs. Real Interest Rates

Real Interest Rate≈Nominal Rate−Expected Inflation\boxed{\text{Real Interest Rate} \approx \text{Nominal Rate} - \text{Expected Inflation}}Real Interest Rate≈Nominal Rate−Expected Inflation​

  • Banks care about real, not nominal rates

X. Unemployment

Unemployment Rate

UR=UnemployedLabor Force×100\boxed{\text{UR} = \frac{\text{Unemployed}}{\text{Labor Force}} \times 100}UR=Labor ForceUnemployed​×100​

Labor Force Participation Rate

LFPR=Labor ForceAdult Population×100\boxed{\text{LFPR} = \frac{\text{Labor Force}}{\text{Adult Population}} \times 100}LFPR=Adult PopulationLabor Force​×100​

XI. Types of Unemployment

  • Frictional: Between jobs

  • Structural: Skills mismatch

  • Cyclical: Caused by recessions

XII. Natural Rate of Unemployment (NRU)

NRU=Frictional+Structural\boxed{\text{NRU} = \text{Frictional} + \text{Structural}}NRU=Frictional+Structural​

  • Typically 4–5%

  • Occurs at full employment

  • Cyclical unemployment = 0

XIII. Okun’s Law

1% change in cyclical unemployment⇒2% opposite change in GDP\boxed{1\% \text{ change in cyclical unemployment} \Rightarrow 2\% \text{ opposite change in GDP}}1% change in cyclical unemployment⇒2% opposite change in GDP​

Example:

  • Cyclical unemployment ↓ 3% → GDP ↑ 6%

XIV. Marginal Propensities

MPC+MPS=1\boxed{\text{MPC} + \text{MPS} = 1}MPC+MPS=1​

  • MPC: % of new income spent

  • MPS: % of new income saved

XV. Spending Multiplier

Spending Multiplier=1MPS\boxed{\text{Spending Multiplier} = \frac{1}{\text{MPS}}}Spending Multiplier=MPS1​​

Example:

  • MPS = 0.2 → Multiplier = 5

XVI. Tax Multiplier

Tax Multiplier=MPCMPS\boxed{\text{Tax Multiplier} = \frac{\text{MPC}}{\text{MPS}}}Tax Multiplier=MPSMPC​​

OR

Tax Multiplier=Spending Multiplier−1\boxed{\text{Tax Multiplier} = \text{Spending Multiplier} - 1}Tax Multiplier=Spending Multiplier−1​

XVII. Key Identity (Very Testable)

Y=C+I+G+Xn\boxed{Y = C + I + G + X_n}Y=C+I+G+Xn​​

  • If Investment falls → GDP falls

  • If Consumption rises → GDP rises

XVIII. CPI Limitations (Know These)

  • Substitution Bias

  • New Products

  • Quality Changes

→ CPI overstates inflation