Question

Currently in Latin America’s biggest economy, the number of unemployed persons in Brazil is around 11.9 million. The following are based on the data showing the state of the Brazilian economy in 2019-20: Unemployment rate = 11.2% Underemployment rate = 24.6% Real GDP growth rate = 0.5%

a. What is the ‘underutilisation rate’? Describe how the ‘underutilisation rate’ is a more effective measure of underemployment in the Brazilian economy than the ‘unemployment rate’.

b. Assume that a real GDP per capita growth rate of 3.5% and a natural unemployment rate of 6.0% correspond to the ‘bliss point’, i.e. the long run, full-employment GDP equilibrium in Brazil. Use a well-labelled AD/AS diagram to show the position of this economy in 2020. Explain how the government can use expansionary fiscal policy to move the economy back to the long run, full-employment GDP equilibrium. Draw the AD curve shift(s) associated with this policy on your diagram.

Answer 1

a) Underutilisation rate calculates the numer of people who are unemployed and underemployed out of total labor force. On the other hand, unemployment rate is calculated from unemployed people out of total labor force. Underutilisation rate consider people who are not working as their potential such as someone who have done master degree from some college is doing entry level job. Underutilisation rate is better because it also captures the people who are underemployed in addition to unemployed while unemployment rate only captures unemployed people.

b) If current unemployment rate is 11.2% while bliss point is 6%. Government wants to reduce the unemployment rate through which they can adopt expansionary fiscal policy by raising government expenditure and reducing tax thereby raising the aggregate demand in the economy. If unemployment rate is 11.2%, output level is at Y0 which is under full employment level and creates recessionary gap in the economy equal to Y1 - Y0. By adopting expansionary fiscal policy, aggregate demand curve will shift to its right from demand to new demand and tends to raise output level to its long run potential level of Y1 which vanish recessionary gap and reduces unemployment rate to 6%.