Macroeconomics Formulas: GDP, Inflation, Unemployment & Money

Macroeconomics: Key Formulas and Concepts

Key Macroeconomic Formulas

• GDP Deflator = (Nominal GDP / Real GDP) * 100
• Expenditure approach: Y = Consumption + Investment (including inventory changes) + Government purchases + Net exports
• Income approach: Y = Income = Wages + Interest + Rental income + Profits
• CPI = (Cost of base-year basket at desired-year prices / Cost of base-year basket at base-year prices) * 100
• Real value (Year Y) = Nominal value (Year X) * (CPI Year Y / CPI Year X)
• MPC = Increase in spending / Increase in income (or output)
• Expenditure multiplier = 1 / (1 - b)
• Taxation multiplier = -b / (1 - b)
• Unemployment rate = (Number of unemployed / Labor force) * 100
• LFPR (Labor Force Participation Rate) = (Labor force / Working-age population) * 100
• GDP in year A = GDP in year B * (1 + growth rate) ^{(year A - year B)}
• Growth rate of output (g_Y) = g_A + a * g_K + (1 - a) * g_L
  • or equivalently g_Y = g_A + a * g_L + (1 - a) * g_K depending on the parameter interpretation
  • where g_A = growth of technology (total factor productivity), g_Y = growth rate of output
• Real interest rate = Nominal interest rate - Inflation rate
• Quantity theory of money: M * V = P * Y
  • p = price level
  • y = real output
  • m = money supply
  • v = velocity of money

Inflation, CPI and Policy

Ch. 16:

• Core inflation: excludes goods with historically volatile price changes.
• Headline inflation: includes all goods that the average consumer buys.
• Classical theory of inflation: in the long run, increases in the money supply will lead to an increase in prices.
• The Fed’s dual mandate is to maintain price stability and ensure full employment.

Monetary Theory and Money Supply

The Quantity Theory of Money (M * V = P * Y) links the money supply to the nominal value of output. Definitions above clarify P, Y, M, and V.

Financial Concepts and the Housing Bubble

• Ch. 17: Irrational expectations: the price of an asset can become so inflated that it is unclear why it should be so valuable.
• Leverage: the practice of using borrowed money to pay for investments.
• Securitization: the practice of packaging individual debts into a single uniform asset.

The housing bubble was created through a series of actions by banks and homeowners, including:

• Sudden explosion of cheap and readily available mortgages that encouraged people to buy bigger and better homes.
• Securitization transferred risk away from lenders, which misaligned incentives.
• The U.S. Treasury bailed out banks that were considered “too big to fail.”

GDP Measurement and Labor Concepts

Ch. 7 — GDP: The value-added approach calculates the value that each transaction adds to the economy.

Ch. 8 — Unemployment & Labor:

• Frictional unemployment: workers who are changing location, job, or career.
• Structural unemployment: mismatch between the worker's skills and skills in demand.

Real Wage (Classical)

Real wage / Classical: when wages are higher than the market-clearing level.