Module 01 · Chapters 1, 2

Aggregate Statistics

GDP, inflation, unemployment — what the numbers mean and how they fit together.

“The vocabulary of every macro discussion you will ever have.”

~35 min· 4 sub-skills·6 exercisesExam frequency · high0% mastered

Macroeconomics studies the economy in aggregate. Before we can model how the economy moves, we need to be precise about what we're measuring. Three numbers anchor everything: GDP (total output / income), inflation (the rate at which the average price level rises), and unemployment (the fraction of would-be workers without a job).

This module makes those three numbers — and the relationships between them — second nature.
Italy GDP 2024
€2.18T
+0.9% YoY
HICP inflation
+1.6%
core +2.0%
Unemployment
5.7%
-0.4 pp
Definition·Gross Domestic Product (GDP)
GDP is the market value of all final goods and services produced within a country in a given period. Three equivalent ways to measure it:

- Production / value-added: sum of value-added across all firms (revenue minus the cost of intermediate inputs).
- Income: sum of all incomes earned in production — wages + profits + rents + indirect taxes.
- Expenditure: sum of all spending on final goods and services.

All three give the same number — that's the fundamental identity of the national accounts.
National accounts identity
$Y \;\equiv\; C + I + G + (X - M)$
$Y$
GDP — total final output (= total income = total expenditure)
$C$
private consumption
$I$
investment (firms + housing)
$G$
government purchases of goods & services
$X - M$
net exports
Whatever is produced is bought by households, firms, the government, or foreigners. There is no fifth bucket.
Common misconception
Government spending G includes pensions, unemployment benefits, and welfare cheques.
ActuallyG is **government purchases** of goods and services only. Transfers (pensions, benefits) are not GDP — they're a redistribution, not new production. They show up indirectly via the C they fund.
Nominal GDP mixes price changes and quantity changes. To compare output across years cleanly, we strip out price changes and report real GDP (quantities valued at a fixed base year price).
GDP deflator
$P_t \;=\; \frac{\text{Nominal GDP}_t}{\text{Real GDP}_t} \times 100$
The deflator is the ratio of nominal to real GDP. It's the broadest price index you'll meet — covers everything in GDP, not just consumer goods.
Inflation rate (CPI or deflator)
$\pi_t \;=\; \frac{P_t - P_{t-1}}{P_{t-1}}$
The percentage change in the average price level. Always tied to a specific index.
Tip·CPI vs GDP deflator — pick the right one
CPI is a fixed-basket index — what does the typical urban household's grocery list cost this month vs last month? Used by central banks for inflation targets.

GDP deflator covers everything produced domestically (including investment goods, exports), but excludes imported consumer goods. Used in national accounts.

For exam questions: the central bank watches CPI; macro models call the price level P, which is usually the deflator.
Real interest rate (Fisher)
$r_t \;\approx\; i_t - \pi^e_{t+1}$
$r_t$
real interest rate
$i_t$
nominal interest rate
$\pi^e_{t+1}$
expected inflation over the next period
The real return on saving is the nominal return adjusted for the erosion of purchasing power. Fisher: i ≈ r + π^e.
Unemployment rate
$u \;=\; \frac{U}{L} \;=\; \frac{U}{N + U}$
$u$
unemployment rate
$U$
unemployed (actively looking, no job)
$N$
employed
$L = N + U$
labour force (excludes the inactive)
Discouraged workers who *stop looking* exit the labour force entirely — they vanish from u even though they're still without work.
Figure · Circular flow of income
Every euro of output is a euro of income. Leakages (S, T, M) and injections (I, G, X) net to zero in equilibrium.
Okun's law (output gap form)
$u_t - u_{t-1} \;\approx\; -\beta\,(g_{Y,t} - \bar g_Y)$
$u_t - u_{t-1}$
change in unemployment rate
$g_{Y,t}$
real GDP growth
$\bar g_Y$
trend (potential) GDP growth
$\beta$
Okun coefficient ≈ 0.4 in the EU, ~0.5 in the US
An empirical regularity: when GDP growth is 1 pp above trend, unemployment falls by roughly 0.4 pp.
Pitfall·GDP is a flow, not a stock
GDP is measured per period (per quarter, per year). A country's wealth (stock of capital, housing, human capital) is a separate concept. Confusing the two is the #1 reason students mis-answer 'how big is the economy?' questions.
Exercise · numerical · +10 XP
Compute GDP from the expenditure side
An economy reports: C = 600, I = 150, G = 200, X = 80, M = 100. What is GDP?
Your answer (€bn)
Exercise · multiple choice · +10 XP
Transfers vs purchases
Which of the following is **counted** in this year's GDP?
Exercise · numerical · +15 XP
Real GDP from nominal & deflator
Nominal GDP in 2024 is €2,200 bn. The GDP deflator (2015 = 100) is 110.0. What is real GDP in 2024 (in 2015 €)?
Your answer (€bn (2015 prices))
Exercise · numerical · +15 XP
Real growth from nominal growth
Nominal GDP grew 5.0% from 2023 to 2024. Inflation (deflator) was 3.2%. What is the approximate real growth rate?
Your answer (% per year)
Exercise · numerical · +10 XP
Compute year-over-year inflation
The CPI was 108.5 in Dec 2023 and 111.2 in Dec 2024. What is the year-over-year inflation rate?
Your answer (% per year)
Exercise · numerical · +15 XP
Okun's law — predict the unemployment change
Trend GDP growth is 1.5%. This year, real GDP grew 3.5%. Using an Okun coefficient β = 0.4, by how much (percentage points) does the unemployment rate change?
Your answer (pp (negative = falling))

Mastery check

5 questions · pass with 80%

Answer all five to confirm you've internalised the module. A passing run unlocks the next module.

Q1
"GDP measured by the income approach equals GDP measured by the production approach."
Q2
Nominal GDP rose 6%, the deflator rose 4%. What happened to real GDP (approx.)?
Q3
Which index is most relevant for the central bank's inflation target?
Q4
A new corporate office is built this year. Which GDP component does this enter?
Q5
"When real GDP grows faster than its trend, unemployment tends to fall."

0 / 5 answered

Exam pitfalls

Counting transfer payments (pensions, unemployment benefits) in GDP — they redistribute existing income, not produce new output.
Confusing nominal and real growth. Always check what year's prices are quoted.
Treating CPI and the GDP deflator as interchangeable. CPI = household basket; deflator = everything produced domestically.
Forgetting that the unemployment rate uses the labour force as the denominator, not the population. Discouraged workers exit L entirely.
Using growth rates of nominal variables to argue about real changes (e.g., 'wages rose 4%' without checking whether inflation was 5%).