Formulas cont... Unit 2 (☼.☼)

February 2, 2016

               Net Domestic Product: 

(GDP- depreciation)

               Net National Product:

(GNP- depreciation)

              GNP: 
(GDP + net foreign factor payment) 

Nominal GDP 

• value of output produced in current crises 
•  PxQ=Nominal
• can increase from year to year if output or price increases; to measure price increases, or inflation

Real GDP

• value of output in constant base year prices (price won't change, quantity does)
•  (base yr)P x Q= Real
• Can increase from year to year only if output increases
• Used to measure economic growth & adjusted for inflation 
• Price won't change but quantity will. 

GDP Deflator

• Price index used to adjust from nominal to real GDP

(Nominal GDP/Real GDP) x 100

• In the base year GDP deflator will always equal 100
• In years after the base year, GDP deflator is always greater than 100
• In years before the base year GDP deflator is always less than 100

Consumer Price Index

• most commonly used method of inflation 

Price of market basket in a particular year

                                
                              price of same market basket in the base year    x 100              

Inflation:

(GDP deflator in current year- GDP deflator in old year)

                                           GDP deflator in old year                             x 100

Real Interest Rate: 

• Percentage increase in purchasing power; the borrower must pay the lender for a loan (adjusted for inflation)
• ( Nominal Interest Rate- Inflation)

Helped by Inflation Borrowers

Hurt by Inflation Savers Lenders(Creditors) People on a fixed income

Nominal Interest Rate:

•  Percent increase in money; borrower must pay lender for a loan (not adjusted for inflation)
• Expected Interest Rate+Inflation Premium

Anticipated Inflation = Fisher Effect

COLA: Cost of Living Adjustments 

•  gives automatic wage increases when inflation occurs