1. Formulas for Circular Flow, GDP, Business Cycles, Unemployment, & Inflation Test

2. GDP Related Formulas: = C + IG + G + Xn.
A. Expenditures Approach to GDP:
= C + IG + G + Xn.
* Remember that you are looking for IG or Gross Investment and it already
include depreciation. So if you are given Gross Investment, disregard
depreciation. If you are given Net Investment, however, add back
depreciation to get IG. Also, Xn = Exports minus imports)
B. Incomes Approach to GDP:
= Incomes received from the production of this year’s output
= rent, wages, interest, and profits (the factor payments or payments for the 4
economic resources).
C. Real GDP
= Nominal GDP – inflation since the base year.

3. GDP Related Formulas:
D. Real GDP Calculation:
= Nominal GDP Current Year divided by the GDP Deflator or Price Index Current Year x 100
E. Percentage Change in Real GDP:
= Real GDP Current Year minus Real GDP Base Year divided by
Real GDP Base Year x 100
F. Per-Capita Nominal GDP:
= Nominal GDP divided by population
G. Per-Capita Real GDP:
= Real GDP divided by population

4. Investment or IG Formulas:
A. Net Investment
= Gross Investment – Depreciation
B. Investment or IG is Gross Investment (and includes
depreciation)
= New Plant & Equipment, Net Inventory Investment, and New Construction (residential & commercial)
C. Net Inventory Investment
= Inventory level at the end of the fiscal year
minus inventory level at the beginning of the fiscal year.

5. Unemployment Related Formulas:
A. Labor Force:
= Unemployed + Employed
B. Labor Force Participation Rate:
Labor Force divided by Population x 100
C. Unemployment Rate:
= Unemployed divided by the Labor Force x 100

6. Inflation Formulas:
Quantity Theory – Where the government prints to much money.
The Quantity Theory is Based on The Equation of Exchange:
Equation of Exchange
= MV x PQ
In this equation:
M = money supply,
V = velocity of money,
P = current price level or inflation,
Q = level of real output or real GDP
(therefore PQ = Nominal GDP).

7. For the following data, calculate the following:
1) The CPI for year 1
2) The CPI for year 2
3) The percentage change in CPI from year 1 to year 2. (show your work).
Quantity Bought Unit Price Unit Price Unit Price
Product In the Base Year In Base Yr In Year 1 In Year 2
Spam $ $ 7.00 $ 9.00
PMP
Vienna
Sausages
* PMP is the dreaded Potted Meat Product

8. Quantity Bought Unit Price Product In the Base Year In Year 1 Total
CPI for year 1:
Quantity Bought Unit Price
Product In the Base Year In Year Total
Spam x $ 7.00 $210
PMP x
Vienna x
Sausages Total $ 530

9. CPI for year 2: Percentage change in CPI from year 1 to year 2:
Quantity Bought Unit Price
Product In the Base Year In Year Total
Spam $ $270
PMP
Vienna
Sausages Total $ 580
Percentage change in CPI from year 1 to year 2:
$580 - $530/$530 x 100 = 9.4%

10. Nominal vs. Real Interest Rate: 
A. The Nominal Interest Rate
= real interest rate + expected rate of
inflation.
B. The Real Interest Rate
= Nominal Interest Rate – expected rate of inflation.
The Real Interest Rate is the result of competition between
borrowers and depositors for savings held in financial
institutions.