Question

GDP and unemployment

1. Analyse the effects of quarantine on GDP, employment and the unemployment rate. Which industries are likely to be most affected and which industries are likely to be least affected by quarantine measures?
2. Choose any country that introduced quarantine as an example. What was its GDP growth rate in 2018, 2019? (Indicate the source of information.) Is this country likely to be in recession this year? Refer to two definitions of recession.
3. Are your answers consistent with (general) Okun’s law?

Answer 1

a) In quarantine, citizens of a nation stay in their homes and avoid moving out of their places. The transportation, consumption level, economic activity, businesses etc. take a hit and get reduced to a large level. Since, GDP consists of four things: Consumption , Investment, Government Expenditure and Net Exports, the reduction in all these factors as a result of quarantine resuts in GDP to fall down. The employment also falls as people do not get jobs due to reduced demand in the market, thus, increasing the unemployment rate.

The airlines industry is likely to be most affected by quarantine because there is absolutely no movement of people domesticlly or internationally. However, the food industry (FMCG) is least likely to be affected because food is a necessity.

b) Let us take India as an example as it introduced quarantine in the month of March. India'a GDP growth rate in 2018 was 6.1% and the GDP growth rate in 2019 is 4.2%. This country has low chances of being in recession this year because of the strong monetary and fiscal policy being laid out by the government.

c) As per Okun's law: Okun's law pertains to the relationship between the economy's unemployment rate and its gross national product (GNP). It states that when unemployment falls by 1%, GNP rises by 3% on an average.

This, seems to be true and consistent with the current scenario because the GDP is falling and unemployment rate is rising. This, law holds true even during conditions of quarantine or recession.