Question

Please explain unemployment, how it is calculated and discuss why you think the areas with low unemployment have been able to sustain low rates, especially during the 2008 great recession.

Answer 1

A.Cyclical unemployment is the difference between natural rate of unemployment(assumed 5% for US) and current rate of unemployment.

Uc=5%-10%=-5%

B.Cyclical unemployment occurs when an economy's output deviates from potential GDP- i.e. the long-term trend level of output in an economy. When an economy's output is higher than the level of potential GDP, resources are utilized at levels higher than normal and cyclical unemployment is negative.

C.The natural rate of unemployment is a combination of frictional, structural and surplus unemployment. Even a healthy economy will have this level of unemployment because workers are always coming and going, looking for better jobs. This jobless status, until they find that new job, is the natural rate of unemployment and it can't be 0.

D.During expansion the unemployment falls.During expansion production increases which increases the demand for labour.Therefore,unemployment falls.