§1 Basic Macroeconomic Concepts

Aggregate Output

GDP

• Method 1: GDP is the value of the final goods (and services) produced in the economy during a given period.
• Method 2: GDP is the sum of value added in the economy during a given period.
• Method 3: GDP is the sum of incomes in the economy during a given period.

Nominal vs Real GDP

• Nominal GDP $\$Y_t$ is the sum of quantities of final goods produced times their current price.
• Real GDP $Y_t$ (or just GDP) is the sum of quantities of final goods times constant (not current) prices.

The Unemployment Rate

• Employment is the number of people who have a job: $N$.

• Unemployment is the number of people who do not have a job but are looking for one: $U$.

• The labor force is the sum of the employed and the unemployed: $L$.

• The unemployment rate is the ratio of the unemployed to the labor force:

  $$u=\frac{U}{L}$$

• Discouraged workers are those who give up looking for a job and so no longer count as unemployed.

• The participation rate is the ratio of the labor force to the total population of working age.

The Inflation Rate

• Inflation is a sustained rise in the general level of prices - the price level $P_t$.

• The inflation rate is the rate at which the price level increases:

  $$\pi_t=\frac{P_t-P_{t-1}}{P_{t-1}}$$

• Deflation is a sustained decline in the price level: $\pi_t<0$.

• The GDP deflator is one measure of $P$:

  $$P_t=\frac{\$Y_t}{Y_t}$$

• Another one is the Consumer Price Index (CPI), which is a measure of cost of living.

— Apr 9, 2025

§1 Basic Macroeconomic Concepts by Lu Meng is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. Permissions beyond the scope of this license may be available at About.