Unit 2- Formulas

National Income (2 ways to calculate)

1. Compensation of  Employees + Rents + Interest Income + Proprietor's Income + Corporate Profits
2. GDP - Indirect Business Taxes - Depreciation - Net Foreign Factor Payment 

Gross
Formula: Net + Depreciation

Net Domestic Product(NDP)
Formula: GDP -Depreciation

Net National Product (NNP)
Formula: GNP - Depreciation

Gross National Product (GNP)
Formula: GDP - Net Foreign Factor Payment

Nominal GDP
Definition: The value of output produced in current prices. Output = Quantity × Production

Real GDP
Definition: The value of output produced in constant base year prices.

Formula: Price × Quantity = Nominal and Real GDP

• If you wanted to measure economic growth = GDP 
• If you wanted to measure price increase AKA inflation = Nominal 
• In the base year Nominal GDP will = Real GDP
• In the years after the base year Nominal GDP will exceed Real GDP 
• In the years before the base year Real GDP will exceed Nominal GDP 

GDP Deflation

Definition: Price index used to adjust from Nominal GDP  to Real GDP 

Formula: Nominal GDP ÷ Real GDP ×100

• In the base year, the GDP Deflator = 100
• Years after the base year, the GDP Deflator > 100
• Years before the base year, the GDP Deflator < 100

Consumer Price Index(CPI) 

Definition: The most commonly used measurement of inflation. It measures the cost of a market basket of goods for a typical urban American family.

Formula: Cost of a Market Basket of Goods in a given year ÷ Cost of a Market Basket of Goods in a base year × 100

Inflation

Formula: Price Index in year 2 - Price Index in year 1 ÷ Price Index in year 1 × 100

• Year 1 = Base Year
• Year 2 = Current Year