Question

The following questions require you to determine answers (approximately 100 to 150 words) based on given, data and/or scenario:

1: Can a sudden decrease in unemployment be consistent with declining aggregate output? Also, can sudden increase in unemployment be consistent with a rising RGDP?

Answer 1

Yes, unemployment can increase when GDP is rising and vice versa. While its true that usually unemployment and GDP have opposite relationship, its possible that they both go in same direction. That’s because GDP doesn’t have only labor as a factor. We know that

GDP=Consumption + Investment + Government spending + Net Exports.

We can easily see why a counter-intuitive relationship is sometimes possible- especially in short term. Lets say there was a consumption drop which hit the auto-industry. A lot of labor might shift from there to food industry. Now food industry per labor output is not much as compared to auto so its possible that the overall GDP dropped but overall unemployment decreased.

Also, in terms of inputs, output requires either labor or capital. If a new technology arrives that increases the output at lesser labor, then unemployment will increase even though GDP is increasing (structural unemployment).