Question

Discussion Questions:

1. Discuss the different types of unemployment that exist in the economy.
2. Explain what is participation rate in the labor force?
3. How much does the labor force participation rate affect the unemployment rate?
4. Do you think one type of unemployment is worse than others and why?
5. What can governments do to assist in reducing this type of unemployment?

Calculations:

1. Table 1.0 below provides nominal GDP, real GDP and GDP deflator data.

(a)            Complete Table 1.0

(b)             What is the base year for the GDP deflator?

(c)             Calculate the percentage change in nominal GDP, real GDP, and the GDP deflator between 2014 and 2015.

(d)            Was the increase in nominal GDP due mostly to an increase in real GDP or to an increase in the price level?            

TABLE 1.0

YEAR	NOMINAL GDP	REAL GDP	GDP DEFLATOR
2012	3,055		94
2013		3,170	100
2014	3,410	3,280
2015		3,500	108

     

2. Consider the following data on Canadian GDP:

                                NOMINAL GDP                             GDP DEFLATOR

YEAR             (IN BILLIONS)                (BASE YEAR 2010)

2011                              $725                                         101.2                                          

2012                               $762                                             102.4

a.            What was the growth rate of nominal income between 2011 and 2012? (Note: The growth rate is the percentage change from one period to the next.)

b.            What was the growth rate of the GDP deflator between 2011 and 2012?

c.            What was real income in 2011 measured in 2010 prices?

d.            What was real income in 2012 measured in 2010 prices?

e.            What was the growth rate of real income between 2011 and 2012?

f.            Was the growth rate of nominal income higher or lower than the growth rate of real income? Explain.

3. Suppose that the residents of Wolfgang spend all of their income on cauliflower, broccoli, and carrots. In 2014 they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50. In 2015 they buy 75 heads of cauliflower for $225, 80 bunches of broccoli for $120, and 500 carrots for $100. If the base year is 2014, what is the CPI in both years? What is the inflation rate in 2015?

Answer 1

Calculations

(a)

Year	Nominal GDP	Real GDP	GDP Deflator
2012	3,055	3250	94
2013	3170	3,170	100
2014	3,410	3,280	104
2015	3780	3,500	108

GDP deflator = (nominal GDP/ real GDP) * 100

(b) The base year is 2013 because during this year the nominal GDP is equal to real GDP.

(c) Percentage Change:

Nominal GDP = ((3780 - 3410)/3410) *100 = 10.85%

Real GDP = ((3500-3280)/3280)*100 = 6.71%

GDP Deflator = ((108-104)/104))*100 = 3.85%

(d) The increase in nominal GDP is due to mostly increase in real GDP as change in real GDP is approximately 7 percent whereas increase in price in approximately 4 percent.

Canadian Economy

Growth rate = ((Present value - Past value)/Past Value)*100

(a) Growth rate of nominal income = ((762-725)/725)*100 = 5.10%

(b) Growth rate of GDP deflator = ((102.4 - 101.2)/101.2)*100 = 1.19%

(c) Real income = (Nominal income/ GDP deflator)*100

= (725/101.2)*100 = $716.40

(d) Real income = (Nominal income/ GDP deflator)*100

= (762/102.4)*100 = $744.14

(e) Growth rate of real income = ((744.14-716.40)/716.40)*100 = 3.87%

(f) Growth rate of nominal income is higher than the real income. This is because nominal values take prices also into consideration. Hence the nominal values are always higher than the real values.

Consumer Price Index (CPI)

CPI is computed based on Laspeyres price index formula. The formula states that the same quantity of good is compared within old and new price.

CPI in 2014 = 100 (as 2014 is base year)

CPI in 2015 = ((Q_ca* P_c )²⁰¹⁵ / (Q_ca * P_c )²⁰¹⁴ )*100

=(100/50)*100 = 200

Inflation rate in 2015 = ((Current value - Past value)/Current Value)*100

= ((200 -100)/200)*100 = 50

Discussion Questions:

Different types of unemployment that exist in an economy are –
i. Cyclical unemployment – unemployment occurs due to recession in the
economy, i.e. aggregate demand decreases in the economy. For example The
Great Depression of 1930.
ii. Structural unemployment – Unemployment occurred due to long term changes
in the market structure. For example, Photography film industry.
iii. Seasonal unemployment – Unemployment occurred due to seasonality of an
industry. For example, agricultural industry.
iv. Frictional unemployment – it’s a short-term unemployment situation occurs
mainly when a person looses of leave his/her job and in the process of finding
some other suitable job.
v. Voluntary unemployment – Such unemployment generates in an economy
when some potential labour force chooses not to participate in the labour
force, i.e. opt out not to work voluntarily.
vi. The natural rate of unemployment – This type of unemployment that still exist
in an economy when every market is in equilibrium. This term was coined by
classical school of thoughts.

b) Participation rate in the labour force – It measures an economy active labour force.
Calculated as number of active members of labour force divided by total number of
labour force. It includes all those work force who are actively looking for job. But it
leaves out those potential work force who has voluntarily choose not to participate in
the job market.
c) Labour force participation rate is the percentage of work force who are in the job or
are actively looking for a job. Unemployment rate is the percentage of labour force
who are currently without job. The subtle difference between the two is that those
labour force who are currently looking for job are part of unemployment rate. So
unemployment rate depends upon labour force participation rate on condition that
higher the number of labour force who are searching for job higher will be the
unemployment rate in the economy.