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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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=
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
For example, if you put $1,000 per year into the bank at 4% interest, how much would
you have saved after 40 years?
$1000 (1.04)
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 Spring '08
 KUTSOATI

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