MACROECONOMICS STUDY GUIDE Latest Update 2020
o	1) The market value of all final goods and services produced in an economy in a given period of time. This is the TOTAL EXPENIDTURE approach to GDP.
o	2) The sum of all incomes meaning wages, rents and profits generated in an economy in a given period of time. This is the TOTAL INCOME approach to GDP.
o	3) The sum of the value added at each stage of production for a given economy.
•	Y = C + I+ G + (X-M)
o	GDP = Consumption + Investments + Government expenditures + net exports
Consumption includes all private expenditures
Investment includes inventories, whatever a firm spends on equipment or machinery. It also includes structures, factories, or plants.
•	Exports affect the GDP but imports do not.
•	To calculate the GDP:
o	Add up all the goods from a given year.
o	Example: 10 apples are produced for $1 each in 2010. 12 apples are produced for $2 each in 2011.
o	Nominal GDP in 2010 (Does not account for inflation): $10
o	Nominal GDP in 2011: $24
o	Real GDP in 2010: $10 – same for the base year.
o	Real GDP in 2011: To calculate, use the same prices as the base year. $12
•	To calculate the growth rate:
o	2011-2010/2010 x 100%
o	So: 12-10/10 = .2 x100% = 20% growth rate
•	To calculate the GDP deflator:
o	The GDP deflator gets rid of the price effect in the nominal GDP. It helps to measure the production of a country. It calculates the inflation rate
o	Nominal GDP/Real GDP for a given year.
o	2010: $10/$10 x 100 = 100
o	2011: $24/$12 x 100 = 200
•	To calculate the CPI:
o	Calculate the cost of the basket.
o	Same numbers of items, but use the prices for the individual items.
o	If the basket costs $8 in 2010 and $14 in 2011:
o	Then divide the price of the basket.
2010: $8/$8 x 100 = 100
2011: $14/$8 x 100 = 175
o	To find the changes
175-100/100 x 100 = 75% change
The CPI and the GDP deflator both measure the cost of living.
•	Substitution bias – change in price of fruit (different prices for different fruits)
•	Variety bias – overestimation of cost of living
•	Quality bias
•	GDP = Technology (Physical capital, human capital, number of workers, natural sources)
•	F has constant returns to scale.