Question

1. What is the main determinant in the amount of labour input – aggregate labourhours – to produce real GDP?Why isn’t the unemployment rate equal to zero in normal times?Why is cyclical unemployment excluded from the natural rate of unemployment?

Answer 1

A) the main determinant in the amount of labour input to produce real GDP is the wage rate. It determines how many labour hours are supplied and how many labour hours are demanded in order to produce a given level of output. in the labour market the labour demand and labour supply function interact to determine the market which which then determine the level of production

B) unemployment rate is not zero even in the long run full employment equilibrium because there is some unemployment that remain in the economy due to the friction of labour market and the structural problems associated with the economy. Due to this reason the frictional unemployment and structural unemployment both exist even when the economy is operating at full employment level.

C) the cyclical component must be removed when computing the natural rate of unemployment because the natural rate of unemployment is the unemployment which exists at the long run equilibrium. there is no cyclical change occurring in the long-run equilibrium and due to this reason the cyclical component is removed from the natural rate of unemployment. at this level only frictional unemployment and structural unemployment is included.