Introduction & Aggregate Statistics

GDP, Inflation & Unemployment Measurement

coreExam · low

The three core macro aggregates. GDP: total value of final goods/services produced — can be computed three ways (production, income, expenditure). Inflation: π = (Pₜ − Pₜ₋₁)/Pₜ₋₁. Unemployment rate: u = U/(U + N). GDP deflator vs CPI: deflator covers all domestic production; CPI covers a consumer basket.

Derivation

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The Three Big Aggregates

| Aggregate | Definition | Example value (US, recent) | |-----------|------------|-----------------------------| | GDP | Value of final goods/services produced | ~$28 tn (2024) | | Inflation | % change in price level | ~3% | | Unemployment | U/L | ~4% |

Three Ways to Measure GDP

\text{GDP} = \sum \text{value added} = \sum \text{factor income} = C + I + G + NX

All three are equal by accounting — the same total sliced differently.

Nominal vs Real

Y_{\text{real}} = \frac{Y_{\text{nominal}}}{P}

For small changes:

\text{Real growth} \approx \text{Nominal growth} - \text{Inflation}

Unemployment Rate

u = \frac{U}{L} = \frac{U}{U + N}

The denominator is the labour force, not the working-age population. Discouraged workers who leave the labour force lower measured unemployment without improving the economy.

GDP Deflator vs CPI

| Index | Coverage | Weights | |-------|----------|---------| | GDP deflator | All domestic production | Current (Paasche-like) | | CPI | Consumer basket | Base-period (Laspeyres) |

They diverge when import prices or non-consumer investment goods prices move differently.

Worked Example

Working-age pop = 100m, E = 60m, U (searching) = 6m. Nominal GDP rose from 1000 to 1080. Deflator rose from 100 to 105.

Labour force L = 60 + 6 = 66m. LFPR = 66/100 = 66%.
Unemployment rate u = 6/66 = 9.1%.
Nominal GDP growth = 80/1000 = 8%. Inflation = 5/100 = 5%. Real growth ≈ 8% − 5% = 3%.

u = 9.1%. LFPR = 66%. Nominal growth 8%, inflation 5%, real growth ~3%.

Common Mistakes

—Computing u = U/pop instead of U/L — dividing by the labour force, not the total population.
—Ignoring LFPR changes: a fall in LFPR (workers giving up) reduces measured u without improving the economy.
—Confusing GDP deflator with CPI — they can diverge, especially when import/export prices move.
—Treating real and nominal growth rates as additive when the inflation rate is large — use the exact formula for large changes.

Exam Cues

→u = U/L. L = U + N. Simple but easy to get wrong.
→Real growth = nominal growth − inflation (approximation for small changes).
→GDP three methods (value added, factor income, expenditure) — all equal by identity.
→Deflator vs CPI: deflator broader (all domestic); CPI is a consumer basket.