MACROECONOMICS STUDY GUIDE Latest Update 2020

Macroeconomics Notes GDP • Definitions: 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 /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. Biases: • Substitution bias – change in price of fruit (different prices for different fruits) • Variety bias – overestimation of cost of living • Quality bias Productivity: • GDP = Technology (Physical capital, human capital, number of workers, natural sources) • F has constant returns to scale.