formula review sheet

# formula review sheet - Formula Sheet Review Measuring...

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Formula Sheet Review Measuring Economic Activity Gross Domestic Product ( GDP) is the most commonly used measure of economic activity. In order to see if the economy is improving, you can look at whether GDP is growing ( or shrinking) and the rate of that growth. GDP- is the market value of final goods and services produced in a country during a year. To computer US GDP in 2007, for example, we sum the quantity of goods and services produced in the United States in 2007 times their 2007 prices. For example using an economy with only cars and corn fakes: GDP in 2007= (2007 price of cars X quantity of cars produced in 2007) + (2007 price of corn flakes X quantity of corn flakes produced ( in 2007) Real versus Nominal GDP - Essential when measuring the level of economic activity to distinguish changes in prices from changes in quantities For example, US GDP rose from 12.0 Trillion at the end of 2004 to \$12.7 trillion at the end of 2005. Computing the annual growth rate, the percentage change from one year to the next means that the US economy grew by 5.8 percent. GDP growth rate from 2004 to 2005 = Inflation Rate - The rate of growth in the price level Inflation rate = Future Value The value on some future date of an investment made today For example if the present value of your initial investment is \$100, and the interest rate is 5% then the future value is: \$100 + \$100 x (o.o5)= \$105 Present value of the investment + Interest = Future value in one year

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FV = PV + PV x i = PV X(1 +i) Compound Interest The interest on the interest - if you leave an investment longer then one year, you ear the interest on your initial investment For example, say you leave your \$100 deposit in the bank for two years at 5% interest per year. The future value of this investment has four parts. Present value of the initial investment + Interest on the initial investment in first year + Interest on the initial investment in second year + Interest on the interest from first year in second year = Future value in two years \$100 + \$100(0.05) + \$100(0.05) + \$5(0.05) = \$110.25 FORMULA TO USE FV n = PV x (1 + i)² Future value in n years = Present value of the investment X (One plus the interest rate) raised to n All we need to do is calculate one plus the interest rate raised to the nth power and multiply it by the present value
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