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GROSS DOMESTIC PRODUCT (GDP)
GDP measures the total income of everyone in the economy. Measures the total expenditure on the economy’s output of goods and services. TOTAL INCOME = TOTAL EXPENDITURE
Y = C + I + G +NX
Y = GDP
C = Consumption
I = Investment
G = Government Spending
NX = Net exports (Exports-Imports)

REAL VS NOMINAL GDP
NOMINAL GDP production of goods and services valued at current prices.
    NOMINAL GDP = (P1*Q1) + (P2*Q2) of the year specified

REAL GDP production of goods and services valued at constant prices. Designate one year as base year. Not affected by changes in price.
    The first year as the BASE YEAR. Use the prices of base year in all  calculations
REAL GDP = (PofBaseYear*QCurrent Year)+(PofBaseYear*QCurrentYear)

BASE YEAR nominal GDP = real GDP

THE GDP DEFLATOR measures the current level of prices relative to the level of prices in the base year. Can be used to take inflation out of nominal GDP (“deflate” nominal GDP). Reflects prices of all goods and services produced domestically
    NOMINAL GDP   X 100
     REAL GDP

INFLATION economys overall price level rising. The percent change in GDP deflator

INFLATION RATE (GDP) A percentage change in some measure of the price level from one period to the next.
    GDP DEFLATOR IN YEAR 2 - GDP DEFLATOR IN YEAR 1     X  100
            GDP DEFLATOR IN YEAR 1

ECONOMIC GROWTH percent change in real GDP
    REAL GDP YEAR 2 - REAL GDP YEAR 1
     REAL GDP YEAR 1
RECESSION two consecutive quarters of falling GDP
    • Real GDP declines
    • Lower Income ,Rising Unemployment ,Falling profits ,Increased Bankruptcies

CONSUMER PRICE INDEX (CPI)
CPI is the measure of the overall level of prices. Measure of overall costs of goods and services bought by a typical customer.
Fix the basket - which prices are most important to the typical customer
Find the prices at each point in time
Compute the baskets cost - same basket of goods, isolate the effects of price changes
Choose a base year and compute CPI
CPI = Expenditure in Current Year  X 100
    Expenditure in Base Year
INFLATION RATE (CPI)
percentage change in some measure of the price level from one period to the next.
Inflation rate in Year 2:  CPI IN YEAR 2 - CPI IN YEAR 1    X  100
                                         CPI IN YEAR 1

The CPI market basket costs $1200 in 2014 (base year) and $1800 in 2017. What is the
value of the CPI in 2017?
(PriceIn2017 · PriceIn2014) x 100
(1800 · 1400) x 100 = 150
    Inflation
2017: (CPI 2017 - CPI 2016) · CPI 2016
  ((175 - 100) · 100 ) x 100 = 75%
2018: (CPI 2018 - CPI 2017) · CPI 2017
  ((250  - 175) · 175 x 100 = 43%
-GDP DEFLATOR
Ratio of nominal GDP to real GDP. Reflects prices of all goods and services produced domestically
Compares the price of currently produced goods and services to the price of the same goods and services in the base year
-CPI
Reflects price of goods and services bought by consumers
Compares price of a fixed basket of goods and services to the price of the basket in the base year


INDEXATION automatic correction by law or contract of a dollar amount for the effects of inflation.

GROWTH RATE how rapidly real GDP per person grew in the typical year. Because of differences in growth rates, ranking of countries by income changes substantially over time.


REAL INTEREST RATE & NOMINAL INTEREST RATE
NOMINAL INTEREST RATE interest rate as usually reported without a correction for the effects of inflation

REAL INTEREST RATE interest rate corrected for the effects of inflation
Real Interest Rate = Nominal Interest Rate - Inflation Rate

    A bank requires a real return on a mortgage of 3%. They expect the inflation rate to
remain at 2% for the next 30 years. What interest rate do they need to set in order to
receive a real return of 3%
Real Interest Rate = Nominal Interest Rate - Inflation Rate
3% = Nominal Interest Rate - 2%
Nominal Interest Rate = 3% + 2%
Nominal Interest Rate = 5%


You are deciding whether or not the purchase a corporate bond which pays a nominal
interest rate of 5%. You believe that the inflation rate will be 6% over the life of the
bond. What is the real return on this investment
Real Interest Rate = Nominal Interest Rate - Inflation Rate
Real Interest Rate = 5% - 6%
Real Interest Rate = -1%