Question

Explain why an economist would focus on real GDP rather than nominal GDP.

Suppose you walked into an unemployment office and found the following people: a laid-off mall Santa Claus, an unemployed auto-industry worker(who is subject to callback by their company), a woman who lost her job at a manufacter because the company relocated to Mexico, and a Nurse who just moved to town because his wife recently started a new job. Assign the following labels to people above: cyclically unemployed, frictionally unemployed, structurally unemployed, and seasonally unemployed. Then explain the terms of each person.

Answer 1

Nominal GDP is the value of the final goods and services produced in a given year expressed in terms of the prices in that same year whereas Real GDP is GDP evaluated at the market prices of some base year.

Real GDP = Nominal GDP ÷ R where R = GDP Deflator

As per the economists, Real GDP generally measures an economy's actual value more accurately than nominal GDP. By accounting for inflation or deflation, real GDP will only grow when an economy actually produces more valuable outputs.

As a measure of Nominal GDP we can compare two circumstances:

• The poultry produced 200 chickens in 2019 then 220 chickens in 2020. It charges $10 a chicken both years.
• OR the poultry charges $10 a chicken in 2019 then $11 per chicken in 2020. It produces 200 chickens both years.

In both cases nominal GDP would grow by 10% (from $2000 per year to $2200). However in the second case that growth would be delusive. It wouldn't represent an economy generating more goods and services, just an economy charging differently for the same products. Therefore Real GDP is given more preference over Nominal GDP.

Categorising the unemployed people according to their specific terms:

Seasonally unemployed: a laid-off mall Santa Claus

Reason: Seasonal unemployment occurs when people are unemployed at particular times of the year when demand for labour is lower than usual.

Frictionally unemployed: Nurse who just moved to town because his wife recently started a new job

Reason:  It is sometimes called search unemployment and can be based on the circumstances of the individual. It is time spent between jobs when a worker is searching for a job or transferring from one job to another.

Structurally unemployed: a woman who lost her job at a manufacter because the company relocated to Mexico

Reason: Structural unemployment refers to a mismatch between the jobs available and the skill levels of the unemployed.

Cyclically unemployed: an unemployed auto-industry worker(who is subject to callback by their company)

Reason: Cyclical unemployment is the component of overall unemployment that results directly from cycles of economic upturn and downturn.