Greg Hanle (grabbed this from Paul Harvell ;) )Cabrillo College
Macroeconomics
Formulae to Know
and Things to Skip For Exam 1
Calculating per person (per capita) income:
Converstion between Real and Nominal Income:
so
(note: you MUST properly place the decimal place in the reported P, which is stated as a percent. For example, if the price level is reported as 120, then you would use 1.2 -- not 120)
Calculating a rate of growth (which includes inflation):
(note, rates of growth are almost always stated in a percentage amount. So an answer of .07 would be reported as 7%)
Converting between real and nominal interest (Fisher equation):
Calculating amount due in one year:
SAMPLE PROBLEMS TO SOLVE:
YearNominal IncomePrice LevelPopulation
200110 trillion117276 million
200210.5 trillion120279 million
1. Calculate real per person income for 2001 and 2002.
2. Calculate the growth rate of real per person income between 2001 and 2002
3. Calculate the growth rate of nominal income (not per person) between 2001 and 2002.
4. If the nominal rate of interest was 5.5% between 2001 and 2002 and the inflation rate was 2.6%, what was the real rate of interest?
5. If you borrow $300 at 8%, how much will you owe next year?
6. Calculate the rate of inflation from 2001 to 2002.
Answers:
1. real income 2001 = 10 / 1.17 = 8.55 trillion
real income per person 2001 = 8.55 trillion / 276 million = $31,000
real income 2002 = 10.5 / 1.2 = 8.75 trillion
real income per person 2002 = 8.75 / 279 = $31,400
2.growth rate of real person person income between 2001 and 2002 =
($31,400 / $31,000) -1 = 1.013 - 1 = .013 = 1.3%
3.growth rate of nominal income between 2001 and 2002 =
(10.5 / 10) -1 = 1.05 - 1 = .05 = 5%
4.real interest rate = 5.5% - 2.6% = 2.9%
5.What you'll owe next year = $300 * (1 + 8%) = 300 * (1.08) = $324
6.inflation = 120 / 117 - 1 = 1.0256 - 1 = .0256 = 2.56%
Things in the book (and study guide) to skip:
“Measuring a Nation’s Income”: You don't need to know how to compose or create GDP from individual quantity and prices of goods. Nor do you need to know the difference between GNP and GDP. Finally, I don’t cover ways of measuring a nation’s income, e.g. NNP, Personal Income, etc.
Study Guide, skip:
Practice problem #3
Short Answer question #8
Self Test True/False #6, 15, Multiple choice questions #11 - 17.
“Measuring The Cost of Living”: You don't need to know how to construct a Price Index from individual quantity and prices of goods.
Study Guide, skip:
Practice Problem #1, #2 parts e & f (do not skip parts a-d)
Self Test Multiple Choice Questions #7 - 12
“Production and Growth”: Study Guide, skip:
Short Answer #7
Self Test, True/False #12, Multiple choice #17
“Savings, Investment, and the Financial System”: You don't need to know the different types of financial markets, diversification, or how interest rates differ with low/high risk or short/long loan terms.
Study Guide, skip:
Practice Problem 1
Short-Answer #1- 3
Self Test true/false #1 - 4, multiple choice #1, 2, 5, and 9.