2026-04-04
GDP Expenditure Approach: GDP = C + I + G + (X – M)
Nominal GDP = Current year prices × Current year quantities
Real GDP = Base year prices × Current year quantities
GDP Deflator: > GDP Deflator = (Nominal GDP / Real GDP) × 100
Real GDP from Nominal: > Real GDP = (Nominal GDP / Price Index) × 100
Growth Rate Formula: > Growth Rate = [(Value₂ – Value₁) / Value₁] × 100
Example (from Question 1):
| Year | Real GDP | Growth Rate |
|---|---|---|
| 2019 | $1,050 | – |
| 2020 | $1,080 | (1080-1050)/1050 = 2.86% |
| 2021 | $1,134 | (1134-1080)/1080 = 5.0% |
| 2022 | $1,200 | (1200-1134)/1134 = 5.82% |
Recession definition: Two consecutive quarters of negative real GDP growth.
Compound Growth Formula: > Future GDP = Present GDP × (1 + g)^n
Example (from Question 2): - Developing country: $4,000 × (1.06)^30 - Advanced country: $50,000 × (1.02)^30
Convergence Ratio: > Ratio = GDP per capita (rich) / GDP per capita (poor)
Key Insight: Small differences in growth rates compound into large differences over time.
Key Points: - Capital deepening alone → diminishing returns (movement along same production function) - Technological progress → shifts production function upward - Combined effect → sustained growth without diminishing returns
Conceptual diagram (no figure): - Output per worker on vertical axis, capital per worker on horizontal axis - Technology 1, 2, 3 curves shift upward with innovation - Moving from point R to S to T combines capital deepening with technology improvement
Labor Force: > Labor Force = Employed + Unemployed
Unemployment Rate: > Unemployment Rate = (Unemployed / Labor Force) × 100
Labor Force Participation Rate (LFPR): > LFPR = (Labor Force / Adult Population) × 100
Employment-to-Population Ratio: > Employment Rate = (Employed / Adult Population) × 100
Underemployment Rate (broader measure): > = (Unemployed + Underemployed + Discouraged Workers) / Labor Force × 100
| Type | Cause | Example |
|---|---|---|
| Frictional | Time between jobs | Recent graduate searching for first job |
| Structural | Skills mismatch | Factory worker replaced by automation |
| Cyclical | Business cycle downturn | Layoffs during recession |
Natural Rate of Unemployment = Frictional + Structural (not cyclical)
Full employment = Actual unemployment = Natural rate
Explanation: - Wage stuck above equilibrium (due to contracts, minimum wage, efficiency wages) - Recession shifts labor demand LEFT - Quantity supplied > Quantity demanded → cyclical unemployment - Wages don’t fall immediately → market doesn’t clear
Key result: In a recession, sticky wages prevent the labor market from reaching equilibrium, causing involuntary unemployment.
Steps to Calculate CPI:
Inflation Rate: > Inflation Rate = [(CPI₂ – CPI₁) / CPI₁] × 100
| Term | Definition | Example |
|---|---|---|
| Inflation | Rising price level | CPI increases from 100 to 105 |
| Deflation | Falling price level | CPI decreases from 105 to 100 |
| Disinflation | Inflation rate is falling (prices still rise, but slower) | Inflation 8% → 5% → 3% |
Real Wage Calculation: > Real Wage = (Nominal Wage / Price Level) × 100
Real Wage Change: - If nominal wage ↑ 8% and inflation ↑ 10% → real wage ↓ (workers lose purchasing power)
Key features of long-run equilibrium: - LRAS vertical at potential GDP (Yp) - SRAS upward sloping - AD downward sloping - Intersection of all three curves = equilibrium at Yp
Important relationships: - LRAS shifts only with changes in potential GDP (technology, capital, labor) - SRAS shifts with input prices, productivity, supply shocks - AD shifts with changes in C, I, G, or net exports
Oil Price Shock (Negative Supply Shock):
Effects: - Price level ↑ (inflationary pressure) - Real GDP ↓ (recessionary pressure) - Stagflation = stagnant growth + inflation
Positive Supply Shock (Technology):
Effects: - Price level ↓ (disinflationary) - Real GDP ↑ (growth)
Two simultaneous events: 1. Oil prices ↑ (SRAS ← left) 2. AI productivity ↑ (SRAS → right, LRAS → right)
Possible outcomes:
| If dominates | SRAS shift | Price Level | Real GDP |
|---|---|---|---|
| Oil shock | Left | ↑↑ | ↓ |
| Productivity shock | Right | ↓ | ↑↑ |
| Mixed (equal) | Small net shift | ? | ? |
Stagflation outcome: If output < potential GDP but prices ↑ → oil price shock dominated productivity gain.
Common mistakes to avoid: - Don’t use current year quantities for real GDP (use base year quantities) - Don’t forget to convert percentage to decimal in compound growth (6% = 0.06) - Don’t confuse GDP deflator with CPI (GDP deflator includes all domestically produced goods)
Quick checks: - Real GDP growth ≈ Nominal GDP growth – Inflation rate - After base year: Real GDP < Nominal GDP (if inflation positive) - Before base year: Real GDP > Nominal GDP
Labor Market: - LFPR decreases if population grows faster than labor force - Discouraged workers are NOT counted as unemployed (out of labor force) - Underemployment rate > unemployment rate
Inflation: - Base year CPI always = 100 - Inflation rate can be positive even if prices are rising slowly (disinflation) - Deflation is rare and dangerous (Japan 1990s)
AD/AS: - Only supply shocks (oil, productivity) shift SRAS - Demand shocks (confidence, fiscal policy) shift AD - LRAS shifts only with changes in potential GDP
1. GDP: If C=500, I=200, G=300, X=150, M=180 → GDP = ?
2. Growth: $10,000 at 5% for 20 years = ?
3. Unemployment: Labor force 160M, unemployed 8M → Unemployment rate = ?
4. Inflation: CPI 110 → 121 → Inflation rate = ?
5. AD/AS: Increase in government spending shifts which curve? Which direction?
Answers: 1. 500+200+300+(150-180) = 970 2. $10,000 × (1.05)^20 = $26,533 3. (8/160)×100 = 5% 4. (121-110)/110 × 100 = 10% 5. AD shifts RIGHT