Unit 2- Formulas

• Budget: Government purchases of goods/services + government transfer payments - government tax and fee collection.
• + = Deficit and - = surplus
• Trade: Exports-Imports
• + = surplus and - = deficit
• National Income:
1. Compensation of employees + Rents + Interest + Corporate profits + Proprietor's income
2. GDP - Indirect business taxes - depreciation - net foreign factor payment
• Disposable Personal Income: National income - personal household taxes + government transfer payments
• Net Domestic Product(NDP): GDP - depreciation
• Net National Product(NNP): GNP - depreciation
• GNP: GDP + net foreign factor payment

• Nominal and Real GDP
• Nominal GDP: The value of output produced in current year prices.
• Price x Quantity
• Can increase from year to ear if either price or quantity increase.
• If we wanted to measure an increase in prices (inflation), use nominal GDP.  
• Real GDP: The value of output produced in constant base year prices.
• Price x Quantity 
• Adjusted for inflation
• Used to measure economic growth
• Can increase from year to year only if output increases.
• GDP Deflator: Price index used to adjust from nominal to real GDP.
• (Nominal GDP / Real GDP) x 100
• In the base year, the GDP deflator always equals 100.
• For years after the base year, GDP deflator  > 100.
• For ears before the base year, GDP deflator < 100.
• Consumer Price Index(CPI): Most commonly used measurement of inflation.
• Measures the cost of a market basket of goods of a typical urban American family.
• (Cost of a market basket of goods in a given year / Cost of a market basket of goods in the base year) x 100
• Inflation Rate: ((Price index in year 2 - price index in year 1) / price index in year 1) x 100
• Nominal Interest Rate: % increase in money where the borrower must pay the lender for a loan.
• NOT adjusted for inflation
• Expected interest rate + inflation premium
• Unanticipated inflation
• Real Interest Rate: % increase in purchasing power where the borrower must pay the lender for a loan.
• Adjusted for inflation
• Nominal Interest Rate - inflation
•  Fisher effect
• Anticipated inflation