Question

An economist is sitting in the oval office of the white house,across the desk from the president of the United States. The president asks, "How does the unemployment rate look for the next quarter?" The economist answers, "it is not good,I dont think real GDP is going to be as high as we initially thought. The problem seems to be foreign income" it is just not growing at the rate we thought it was going to grow." How can foreign income affect U.S unemployment?

Answer 1

There is a direct relationship between net foreign income and country's Output( gdp) and employment.

* The more the foreign income, the higher ,the level of employment or lower the unemployment rate in the domestic economy

* Foreign income is the invome earned by country's residents, businesses for their services rendered in foreign countries

* When we talk about foreign income ,we mean net factor income from abroad which means yhe differenence between factor Income earned by our residents from abroad and earned by foreigners from our country.

* In AD-AS model ,higher the Aggregate demand ,higher is the level of real gdp and employment

* Net export is an important component of AD which includes net factor income from abroad or foreign income.

* If there is an increase in foreign income,it implies that there will be increase in AD.similarly, a decrease in foreign income implies a decrease in AD and a resultant decrease in real gdp and employment level.

* If in US, the foreign income does not increase as expected, it implies that there will not be expected increase in AD and consequently there will be less expectation of growth of employment rate.

* Thus it is what the economist wanted to explain to US president when he mentioned that due to less growth of foreign income , unemployment rate is not likely to decrease.