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Macroeconomics Foundations (ECON 102) · Module 1 of 7

Measuring the Macroeconomy

GDP and how it is counted, real vs. nominal values, unemployment, and inflation.

In this module
  1. Gross Domestic Product
  2. Unemployment
  3. Inflation & Price Indexes
  4. Check yourself

Gross Domestic Product

  • GDP is the market value of all final goods and services produced within a country in a year. Intermediate goods, used goods, financial transactions, and transfer payments are excluded.
  • Expenditure approach: GDP = C + I + G + NX, where NX = exports − imports. "Investment" means business spending on capital, new housing, and inventories, not buying stocks.
  • Real GDP adjusts for price changes: real GDP = nominal GDP ÷ (GDP deflator / 100).
Worked example

C = $700B, I = $200B, G = $250B, exports = $100B, imports = $150B. Find GDP.

Solution. GDP = 700 + 200 + 250 + (100 − 150) = $1,100B.

Worked example

Nominal GDP is $1,200B and the GDP deflator is 120. What is real GDP?

Solution. Real GDP = 1,200 ÷ 1.20 = $1,000B.

Common mistake: A used car sold this year adds nothing to this year's GDP; only the dealer's service (its markup) counts.

Unemployment

  • Unemployment rate = unemployed ÷ labor force × 100. The labor force is the employed plus people actively looking for work. Discouraged workers are not counted, which makes the rate understate joblessness.
  • Types: frictional (between jobs), structural (skills mismatch), and cyclical (caused by recessions). The natural rate of unemployment = frictional + structural. At full employment, cyclical unemployment is zero.
Worked example

A country has 152 million employed and 8 million unemployed. What is its unemployment rate?

Solution. Labor force = 160 million. Rate = 8 ÷ 160 = 5%.

Inflation & Price Indexes

  • The CPI measures the cost of a fixed basket of consumer goods. Inflation rate = (new CPI − old CPI) ÷ old CPI × 100.
  • Unexpected inflation hurts lenders and people on fixed incomes, and helps borrowers who repay with cheaper dollars.
  • Real interest rate ≈ nominal interest rate − inflation rate (the Fisher equation, using expected inflation).
Worked example

The CPI rises from 250 to 260. What is the inflation rate?

Solution. (260 − 250) ÷ 250 × 100 = 4%.

Check yourself

2 of this module's 5 quiz questions. Pick your answers, then check them in the app, with an explanation for every question.

1. Which is included in this year's GDP?

2. A worker who has stopped looking for a job because she believes none are available is:

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