BUSS1040 · Economics For Business Decision Making
GDP, Inflation & Unemployment
This chapter opens the macro tail (Topics 10–11) that has no ECON1001 equivalent — so it needs its own revision pass. It covers the expenditure approach to GDP (C + I + G + NX), what counts and what does not, real vs nominal GDP and the GDP deflator; then the labour market — the unemployment rate, its frictional/structural/cyclical types, the natural rate and Okun's law; and prices — the CPI, inflation, and real vs nominal wages. It is examined as definitional MCQ ('does this count in GDP?') and short calculation (deflator, unemployment rate, real GDP).
What this chapter covers
- 011. GDP by expenditure: GDP = C + I + G + NX, with NX = exports − imports
- 022. What investment I includes (business fixed investment, NEW housing, inventory change)
- 033. What is EXCLUDED: transfers, intermediate goods, second-hand sales (only the dealer margin counts)
- 044. Real vs nominal GDP (base-year vs current prices) and the GDP deflator = 100 × nominal/real
- 055. Labour force = employed + unemployed; unemployment rate = unemployed / labour force
- 066. Types of unemployment: frictional, structural, cyclical; natural rate = frictional + structural
- 077. Okun's law (course form): contractionary gap ≈ β × cyclical unemployment
- 088. CPI and inflation (= %Δ CPI); real wage = nominal wage × (base CPI / current CPI)
Nominal GDP, real GDP and the GDP deflator
- 2 marksNominal GDP 2025 uses 2025 quantities at 2025 prices: 120×250 + 50×500 = 30,000 + 25,000 = $55,000.
- 2 marksReal GDP 2025 uses 2025 quantities at BASE-year (2024) prices: 120×200 + 50×400 = 24,000 + 20,000 = $44,000.
- 1 markGDP deflator = 100 × nominal/real = 100 × 55,000/44,000 = 125.
- 1 markInterpret: a deflator of 125 means prices have risen about 25% relative to the base year — real output (not price) is what real GDP captures.
Key terms
- GDP (expenditure approach)
- The market value of all final goods and services produced in an economy in a period: GDP = C + I + G + NX, where NX = exports − imports. Only final output counts; intermediate goods and second-hand sales do not (a used-good resale adds only the dealer's value-added margin).
- Investment (I) in GDP
- Business fixed investment (plant and equipment), NEW residential construction, and the change in inventories. It excludes financial 'investing' such as buying shares or existing assets, which are transfers of ownership, not new production.
- Real vs nominal GDP
- Nominal GDP values output at current-year prices; real GDP values current-year output at base-year prices, removing the effect of price changes. Real GDP growth measures genuine output growth.
- GDP deflator
- A price index for all of GDP: deflator = 100 × (nominal GDP / real GDP). It equals 100 in the base year; the percentage change in the deflator is one measure of inflation.
- Unemployment rate and its types
- Labour force = employed + unemployed (people 15+ actively seeking work); the unemployment rate = unemployed / labour force. Frictional (between jobs) + structural (skills–jobs mismatch) make up the natural rate; cyclical unemployment is the extra caused by a downturn.
- CPI, inflation and the real wage
- The CPI prices a fixed basket relative to a base; inflation is the percentage change in the CPI. The real wage = nominal wage × (base CPI / current CPI) — it adjusts pay for the cost of living, so a nominal rise can still be a real cut if prices rise faster.
GDP, Inflation & Unemployment FAQ
What counts in GDP and what doesn't?
GDP counts the market value of FINAL goods and services newly produced in the period: consumption (C), investment (I = business plant, new housing, inventory change), government purchases (G) and net exports (NX). It EXCLUDES: transfer payments (jobseeker, pensions — no production), intermediate goods (already in the final good's price), and sales of existing/second-hand assets (no new output — only the dealer's value-added margin counts, e.g. buy a car for $18,000 and resell for $20,000 adds just $2,000). Financial 'investment' like buying shares is not GDP investment.
What is the difference between real and nominal GDP, and how do I get the deflator?
Nominal GDP values this year's output at THIS year's prices, so it rises with both more output and higher prices. Real GDP values this year's output at BASE-year prices, so it isolates the change in quantities. The GDP deflator converts between them: deflator = 100 × nominal/real. It equals 100 in the base year by construction; a deflator of 125 means prices are 25% higher than the base year. To compute, multiply current quantities by base prices for real GDP and by current prices for nominal GDP, then take the ratio × 100.
How do I compute the unemployment rate and cyclical unemployment?
First get the labour force = employed + unemployed (only people 15+ who are either working or actively seeking; discouraged workers and non-participants are excluded). The unemployment rate = unemployed ÷ labour force. For cyclical unemployment, recall the natural rate = frictional + structural; cyclical = actual rate − natural rate. For example, an actual rate of 10% with frictional 3% and structural 4% gives a natural rate of 7% and cyclical unemployment of 3% — the part attributable to the business cycle.
How is this chapter examined?
Heavily as MCQ on definitions and inclusions ('which of these adds to GDP?', 'which type of unemployment is this?') and as short calculations: nominal vs real GDP and the deflator, the unemployment rate from labour-force data, cyclical unemployment via the natural rate, and real vs nominal wages from a CPI. Because the macro tail has no micro analogue and the final draws ≈80% from Topics 6–12, this material needs deliberate, separate revision rather than being absorbed alongside the micro topics.
Exam move
Treat the macro tail as new territory and give it its own study blocks rather than cramming it with the micro you already half-know. Memorise the GDP identity (C + I + G + NX) and, just as importantly, the EXCLUSIONS list (transfers, intermediates, second-hand sales except the dealer margin) — that distinction drives most of the MCQs. Drill the three small calculations until they are reflexes: deflator = 100 × nominal/real (real uses base prices), unemployment rate = unemployed/labour force, and cyclical = actual − natural rate. Keep the unemployment types and the real-wage adjustment (nominal × base CPI/current CPI) on a flashcard. Finally, practise reading short data tables fast, since the marks come from correct setup and clean arithmetic, not theory.
