Macroeconomics Final Exam Study Guide: GDP, Unemployment, Inflation, Aggregate Demand & Supply

Macroeconomics Overview

Key Areas of Macroeconomic Analysis

Macroeconomics studies the behavior of the economy as a whole, focusing on broad aggregates and their interactions. The main topics include:

• Economic Growth Over Time: Examines how the total output of an economy increases.

• Inflation and Price Levels: Studies changes in the general price level and purchasing power.

• Unemployment and Labor Market: Analyzes the dynamics of employment and joblessness.

• Business Cycles: Investigates fluctuations in economic activity over time.

• Aggregate Demand and Aggregate Supply: Explores total spending and production in the economy.

GDP Basics

Definition and Measurement

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country in a given period.

• Formula: $GDP = C + I + G + NX$

• C: Consumer spending

• I: Business investment

• G: Government purchases

• NX: Net exports ($NX = ext{exports} - ext{imports}$)

GDP counts only final goods and services. It does not include:

• Underground/illegal economy

• Intermediate goods

• Non-market activities (e.g., household production)

• Measures of happiness or well-being

Nominal GDP uses current prices. Real GDP uses base year prices to remove inflation effects.

GDP vs. GNP

GDP measures production within a country's borders. Gross National Product (GNP) measures production by a country's citizens, regardless of location.

• Example: A US company in Japan counts toward Japan's GDP, but US GNP.

What Increases Measured GDP?

• More paid market transactions

• Legalization of previously illegal activity (e.g., marijuana becoming legal)

What GDP Does Not Measure

• Leisure time

• Environmental quality

• Household production (e.g., cooking, cleaning)

Unemployment

Labor Force and Unemployment Rate

The labor force consists of all employed and unemployed individuals actively seeking work.

• Unemployment Rate Formula: $\text{Unemployment Rate} = \frac{\text{Unemployed}}{\text{Labor Force}} \times 100$

Types of Unemployment

• Frictional: Between jobs or new graduates entering the workforce

• Structural: Skills no longer needed due to technological change or shifts in demand

• Cyclical: Caused by economic downturns (recessions)

• Seasonal: Predictable timing (e.g., holidays, weather)

Full employment does not mean 0% unemployment; frictional and structural unemployment always exist.

Price Level and CPI

Consumer Price Index (CPI)

The CPI measures the average change in prices paid by consumers for a basket of goods and services.

• CPI Formula: $\text{CPI} = \frac{\text{Cost of basket this year}}{\text{Cost of basket base year}} \times 100$

Inflation Rate Formula:

• $\text{Inflation Rate} = \frac{\text{CPI}_{\text{new}} - \text{CPI}_{\text{old}}}{\text{CPI}_{\text{old}}} \times 100$

If wages increase faster than CPI, purchasing power rises. If CPI increases faster than wages, purchasing power falls.

Deflation is a decrease in the general price level.

Aggregate Expenditure (AE) Model

AE Model and Equilibrium

The Aggregate Expenditure (AE) Model shows the relationship between total spending and total output at different price levels.

• AE Formula: $AE = C + I + G + NX$

• Equilibrium: $AE = GDP$

If $AE < GDP$:

• Unplanned inventories rise

• Production falls

• GDP and jobs go down

If $AE > GDP$:

• Unplanned inventories fall

• Production rises

• GDP and jobs go up

Aggregate Demand (AD) and Aggregate Supply (AS)

Aggregate Demand (AD)

Aggregate Demand shows total spending at each price level.

• Price up: move up along AD → real GDP down

• Price down: move down along AD → real GDP up

AD shifts when:

• Consumer confidence changes

• Investment changes (interest rates)

• Government spending changes

• Net exports change (world economy)

Aggregate Supply (AS)

• SRAS (Short-Run Aggregate Supply): Upward sloping

• LRAS (Long-Run Aggregate Supply): Vertical at potential GDP (full employment)

SRAS shifts right when:

• Wages fall

• Input costs fall

• Technology improves

SRAS shifts left when:

• Wages rise

• Oil prices rise

• Negative supply shock (disasters)

In the long run, the economy self-corrects by wage adjustments.

Equilibrium on AD-AS Graph

• Short Run: AD and SRAS meet anywhere

• Long Run: AD, SRAS, and LRAS meet at the same point

If equilibrium is left of LRAS:

• Recession gap

• Output below potential

• Unemployment high

• SRAS will shift right over time

If equilibrium is right of LRAS:

• Inflation gap

• Economy overheated

Minimum Wage and Unemployment

Effects of Minimum Wage

• If minimum wage > market wage: labor supply > labor demand → unemployment rises

Net Exports

Impact of Inflation on Net Exports

• If US inflation lower than other countries: US goods cheaper, exports increase, AD shifts right

Summary Table: Key Macroeconomic Formulas

Concept	Formula (LaTeX)	Description
GDP	$GDP = C + I + G + NX$	Total output produced within a country
Unemployment Rate	$\frac{\text{Unemployed}}{\text{Labor Force}} \times 100$	Percentage of labor force unemployed
CPI	$\frac{\text{Cost of basket this year}}{\text{Cost of basket base year}} \times 100$	Measures price level changes
Inflation Rate	$\frac{\text{CPI}_{\text{new}} - \text{CPI}_{\text{old}}}{\text{CPI}_{\text{old}}} \times 100$	Annual rate of price increase

Super Fast Review

• New grads → frictional unemployment

• Recession layoffs → cyclical unemployment

• Potential GDP = LRAS vertical line

• Economy returns to long-run equilibrium over time

• Movement along AD: caused by price changes

• Shifts in AD: caused by spending changes

• Shifts in SRAS: caused by input cost changes

• Long run: AD + SRAS always move economy back to LRAS

Additional info: These notes cover core macroeconomic concepts relevant for final exam preparation, including GDP, unemployment, inflation, aggregate demand and supply, and the effects of policy and external shocks on the economy.