Question

What is the relationship between the unemployment rate and GDP?

Answer 1

Economic growth is one of the key macroeconomic variables and is monitored closely by policymakers and the public alike. In addition to inflation, exchange rate and unemployment rate, it helps to create an overview of the economy and development level of a country. Typically statistics on gross domestic product are used to calculate economic growth, as it quantifies the overall income of everybody in the country. Therefore differences in real GDP growth rate can explain the observed differences in living standards across countries.

Another key macroeconomic variable is the unemployment rate, because it shows how well an economy uses its resources. Unemployment can not be zero even if, due to frictional and structural unemployment, the economy it operates at full capacity. Frictional unemployment depends on the amount of time spent matching the workers and employers. Due to imperfect information about job vacancies, relative geographic immobility of the workers and wage rigidity, this period can vary quite a lot.

The GDP obtained when the economy is fully operating is called natural or potential GDP. If GDP is above its natural level, the output gap will be positive and inflationary pressures on the economy will be felt. The only way GDP will grow without higher inflation is either a greater capital stock or a technical process change that will dictate an upward shift in the role of output. Potential GDP is not measurable, so we must evaluate the long-term trend of actual GDP in order to quantify it.