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Macro Economy Formulas

In: Business and Management

Submitted By cagribey
Words 631
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1. Rule of 70: Used to determine how many years it takes for a value to double, given a particular annual growth rate. For example, if you put $20,000 in the bank and it earns yearly interest of 7%, then it will take 10 years (70/7) for your income to double. 70/x = # years to double where x equals growth rate.
2. Y = C + I + G + NX – the spending approach to calculating GDP.
3. S = I in a closed economy (no trade) and S = I + NX in an open economy
4. Calculating Nominal GDP: Multiple the number of each good produced times the price of each good: Photdog*Qhotdog + Phamburger*Qhamburger.
5. Calculating Real GDP: this proceeds just as calculating nominal GDP, but instead of current prices you use base prices: Photdog(base year)*Qhotdog(current year) + Phamburger (base year)*Qhamburger (current year). Side implications: In the base year Nominal GDP = Real GDP, with inflation Nominal GDP > Real GDP.
6. GDP deflator: A measure of the cost of living (substitute for the CPI). GDP deflator = (Nominal GDP/Real GDP)*100. Remember that this is an index. Side implication: In the base year the GDP Deflator = 100.
7. Constructing the CPI: step 1: compute the cost of a market basket in each year (prices times quantities), step 2: choose a base year. Step 3: Calculate the CPI for the current year by: (Cost current year)/(cost in base year)*100. Side implication: in the base year the CPI = 100. With inflation, CPI increases.
8. The inflation rate via the CPI: (CPI current year – CPI previous year)/CPI previous year all times 100. Note that this is just a percentage change. The inflation rate is the percentage change in the CPI from one period to the next. You could also calculate the percentage change in the GDP (implicit) price deflator from year to year to derive at an alternative measure of inflation.
9. Correcting for inflation: Let’s adjust for inflation so we can, in a...

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