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Macroeconomics Key Concepts and Formulas

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  • What is GDP?

    GDP is the market value of all final goods and services produced in a country during a period, typically one year.

  • What are the three methods to measure GDP?

    1. Value Added (Sales - Cost of intermediate goods)
    2. Total Factor Income (Sum of wages, profits, rent)
    3. Total Production (Aggregate Expenditure)

  • Difference between Nominal and Real GDP

    Nominal GDP uses current prices; Real GDP uses base year prices to adjust for inflation.

  • What is the labor force?

    The total number of workers and potential workers, including both employed and unemployed individuals.

  • Define unemployment rate formula

    Unemployment rate = (Number of unemployed / Labor force) x 100

  • Types of unemployment

    Structural, Frictional, and Cyclical unemployment.

  • What is inflation?

    Inflation is an increase in the overall price level of goods and services.

  • What does the Consumer Price Index (CPI) measure?

    CPI measures the typical consumer's cost of living based on a fixed basket of goods and services.

  • Difference between CPI and GDP deflator

    CPI includes imported goods and uses a fixed basket; GDP deflator excludes imports and uses a changing basket of currently produced goods.

  • Formula for Real GDP

    Real GDP = (Nominal GDP / Price Deflator) x 100

  • What is the Rule of 70?

    Rule of 70 estimates years to double = 70 / annual growth rate (in percent).

  • What is the natural rate of unemployment?

    The long-run average or target rate of unemployment when the economy is at full capacity.

  • What is the difference between nominal and real interest rates?

    Nominal interest rate is not adjusted for inflation; real interest rate is adjusted for inflation.

  • What is Gross National Product (GNP)?

    GNP adds income of domestic entities abroad and subtracts income of foreign entities domestically.

  • What is the labor force participation rate formula?

    Labor force participation rate = (Labor force / Working age population) x 100

  • What are discouraged workers?

    Individuals who have stopped looking for work in the last 4 weeks and are not counted in the labor force.

  • What causes structural unemployment?

    Minimum wage laws, unions, technology changes, and efficiency wages reduce available jobs.

  • What is frictional unemployment?

    Short-term unemployment from job search, entering/reentering workforce, or seasonal factors.

  • What is cyclical unemployment?

    Unemployment caused by economic recessions and short-term fluctuations in the business cycle.

  • What is potential GDP?

    The level of real GDP when all firms operate at normal capacity with full employment.

  • What factors increase potential GDP?

    Labor force growth, more capital stock, and technological advances.

  • What is the formula for GDP in an open economy?

    GDP (Y) = Consumption (C) + Investment (I) + Government purchases (G) + Net exports (NX)

  • What is the formula for GDP in a closed economy?

    GDP (Y) = Consumption (C) + Investment (I) + Government purchases (G)

  • What is the formula for total savings in an economy?

    Total savings (S) = Y - C - G (Income minus consumption and government spending)

  • What is a financial intermediary?

    Firms like banks and mutual funds that channel funds from savers to borrowers.

  • What is hyperinflation?

    Very high and accelerating inflation, often over 50% per month, eroding currency value rapidly.

  • What is the Gini coefficient?

    A measure of income inequality ranging from 0 (equal income) to 1 (all income to one person).

  • What is labor productivity?

    Output produced per worker per hour of work.

  • What are the main shortcomings of GDP?

    Excludes household production, underground economy, used goods, and government transfer payments.