AP Macroeconomics Formulas and Definitions:
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.
Y = C + I + G + NX
– the spending approach to calculating GDP.
S = I in a closed economy (no trade) and S = I + NX in an open economy
Calculating Nominal GDP:
Multiple the number of each good produced times the price of each
Photdog*Qhotdog + Phamburger*Qhamburger
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.
A measure of the cost of living (substitute for the CPI).
GDP deflator = (Nominal
. Remember that this is an index.
Side implication: In the base year the
GDP Deflator = 100.
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.
The inflation rate via the CPI: (CPI current year – CPI previous year)/CPI previous year all
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.
Correcting for inflation:
Let’s adjust for inflation so we can, in a more meaningful way, compare
the dollar values of different points in time.
Convert a figure in 1990 to its current value:
current value = value in 1990 * (CPI in 2000/CPI in 1995). For example, Babe Ruth earned
$80,000 in 1931. Translating to current dollars means: current value = 80,000 * (107.6/8.7) =
$989,000. So $80,000 back then is equivalent to $989,000 today…THIS ONE IS
10. Real interest rate = nominal interest rate – inflation rate.
11. Production function: Y = AF(L,K,H,N)
12. Productivity: Y/L = AF(1,K/L, H/L, N/L)
Unemployment Rate = (Number of Unemployed/Labor Force)*100.
Key, first get the
labor force – all the folks who are actively seeking employment!
Labor force participation rate:
(Labor force/adult population)*100.