Macro Measures

Unit 2: Macro Measures Definition of Gross Domestic Product (GDP): Dollar value of all final goods and services produced within a country's border in one year. GDP = C + I + G + Xn Real GDP: Adjusted for inflation Nominal GDP: In this year's dollars Three things not included in GDP: Intermediate goods Non-production transactions Non-market activities Business Cycle Label peak, recession/contraction, trough, expansion GDP Deflator Practice The Nominal GDP is $100 billion and the Real GDP is $80 billion. Calculate the GDP deflator. 1 100 ÷ 80 = 125   The Real GDP is $100 billion and the GDP deflator is 200. Calculate the Nominal GDP. 100 x 2 = 200 The Real GDP is $200 billion and the GDP deflator is 120. Calculate the Nominal GDP. 200 x 1.2 = 240 The Nominal GDP is $300 billion and the GDP deflator is 150. Calculate the Real GDP. 300 ÷ 1.5 = 200 The Nominal GDP is $100 billion and the GDP deflator is 125. Calculate the Real GDP. 100 ÷ 1.25 = 80 Measuring Unemployment Frictional Unemployment: Looking for a new job, seasonal workers Structural Unemployment: Skills no longer apply to current work Cyclical Unemployment: Results from recession Natural Rate of Unemployment (NRU): Includes Frictional/Structural 4% - 6% Measuring Inflation Market Basket: 200 commonly purchased goods Consumer Price Index (CPI) Equation CPI = (Price of market basket in current year / Price of market basket in base year) x 100 CPI Practice* Using the values of the market baskets below, calculate the CPI for each year. Start with 2009 as the base year then recalculate with 2010 as the base year. Lastly, recalculate with 2011 as the base year.   Year Market Basket Base Year 2009 Base Year 2010 Base Year 2011 2009 $20 100 50 40 2010 $40 200 100 80 2011 $50 250 125 100 Interest Rates and Inflation Real Interest Rate = nominal interest rate - expected inflation Nominal interest rate = real interest rate + expected inflation   1. If the nominal interest rate is 7% and expected inflation is 2%, what is the real interest rate? 5% 2. If the real interest rate was -2% and the nominal interest rate was 3%, what was the inflation rate? 5% Causes of Inflation 1. Quantity Theory of Money - Print too much money 2. Demand-Pull - Too few dollars 3. Cost-Push - Higher costs → higher prices Quantity Theory of Money Equation: M x V = P x Y Assume the amount of money is $5 and it is being used to buy 10 products with a price of $2 each. 1. How much is the velocity of money?   2. If the velocity and output stay the same, what will happen if the amount of money increases to $10?