Measuring the Economy 2

Contents

Problems

Problem : List 3 costs of unemployment.

The costs of unemployment include a reduction in the standard of living, emotional stress, and a loss of output for society.

Problem : Please explain what is meant by Okun's law.

Okun's law describes the relationship between real GDP and unemployment. The equation for Okun's law is:

(the percentage change in real GDP) = 3% - 2 * (change in the unemployment rate).

This equation basically says that real GDP grows at about 3% per year when unemployment is normal. For every point above normal that unemployment moves, GDP falls by 2%. Similarly, for every point below normal that unemployment moves, GDP rises by 2%.

Problem :

Using Okun's law, determine the percent change in real GDP if the unemployment rate goes from 8% to 4%.

The equation for Okun's law is (the percentage change in real GDP) = 3% - 2 * (change in the unemployment rate). Using the information given in the problem, we get 3% - 2 * (-4) = 11%.

Problem : List the 3 major types of unemployment and the 4 major reasons for unemployment.

The 3 major types of unemployment are frictional, structural, and cyclical. The 4 major reasons for unemployment are minimum wage laws, labor unions, efficiency wages, and job search.

Problem : Find the unemployment rate given that a survey by the BLS reveals 30 people employed 10 people unemployed, and 40 people out of the labor force.

The labor force is the sum of the employed plus the unemployed or 30 + 10 = 40 people. The unemployment rate is the ratio of the unemployed to the total labor force or (10 / 40) = 25%.