Question

Assume the total population of the US is 330 million, and the civilian labor force is 165 million. In the past 6 weeks, new claims for unemployment compensation totalled 30 million.

a) If that 30 million comprises all of the unemployed, what is the current unemployment rate?

b) If the NRU is 5%, what is the rate of cyclical unemployment?

c) According to Okun's Law, what percentage of potential GDP is being foregone? What is the dollar value of foregone output?

Answer 1

a. The unemployment rate is a part of the labor force that is jobless

Labor force = 165 million

Unemployed = 30 million

Unemployment rate

=30/165*100

=18.18%

b. NRU or Natural Rate of Unemployment is 5% and the unemployment rate is 18.18 %.

NRU includes frictional and structural unemployment and not cyclical unemployment.

So cyclical unemployment = unemployment rate - NRU

=18.18%-5%

=13.18%

According to Okun's Law

It means when unemployment goes up by 1% GDP falls by 2%

Unemployment in our case rose by 13.18% so 13.18%*2 = 26.36% of potential GDP is being foregone.

The dollar value of foregone GDP cannot be calculated until the financial year is over and we see for how long the unemployment rate was that much so let's assume that the unemployment rate will be 18.18% for all year. US GDP was 21.44 trillion USD in 2019. so that is our potential GDP.

Potential GDP = $21.44 trillion

GDP loss = 26.36%

=26.36% of 21.44 trillion

= 5.6515 trillion