Macro Exam 2
What do the growth accounting studies conclude are the determinants of growth? Which one seems most important?
Capital deepening (increases in physical capital per worker and human capital per worker) and better technology lead to growth. Better technology appears to account for about half the growth that occurs.
What is capital deepening?
Capital deepening is when the amount of physical capital per worker or human capital per worker increases. Capital deepening increases labor productivity.
If you are out of school but working part time, are you considered employed or unemployed in U.S. labor statistics? If you are a full time student and working 12 hours a week at the college cafeteria are you considered employed or not in the labor force? If you are a senior citizen who is collecting social security and a pension and working as a greeter at Wal-Mart are you considered employed or not in the labor force?
Part-time workers are counted as employed. One need not be retired to collect Social Security. So in all three cases, the person is employed.
A local bakery buys $3,000 worth of oatmeal from a local miller and uses it to make cookies that it sells to the public. Individual residents of the town buy $2,000 worth of oatmeal from the miller and use it to make cookies that they give to family and friends. Looking ONLY at the $5,000 worth of oatmeal sold by the miller, how much of it is counted in GDP?
$2,000. The $2,000 worth sold to individual residents is a final good. The $3,000 worth sold to bakery is an intermediate good, and so is not counted in GDP. The value of the $3,000 worth of oatmeal will be counted in the value of the cookies produced and sold by the bakery.
. Empirically, market-oriented economies tend to grow faster than command economies. Give some reasons why that is.
A complete answer to this question would require many years of study. For now, recognize that market economies generally provide much better incentives that encourage people to work hard, innovate, save, and invest. In addition, command economies send out orders (commands) from the central government about what to produce and how to produce. But individuals typically have better information about their local situation than the central government. Modern economies are FAR too complex for a government to know how to operate in detail.
Under what condition would a decrease in unemployment be bad for the economy?
A decrease in unemployment would be bad for the economy if it were the result of unemployed people dropping out of the labor force
In a particular labor market, the equilibrium wage is $10 per hour. If a law were passed requiring employers to pay $20 per hour, what two things would happen that would cause an increase in the number of unemployed people?
A minimum wage set above the equilibrium wage will reduce the number of workers firms will hire. In addition, the higher wage will induce more people to look for work. In other words, it reduces the quantity of workers demanded and it increases the quantity supplied.
With respect to business cycles, what is an "expansion?" What is a "contraction?"
An expansion is a period of time when real GDP is rising. A contraction is a period of time when real GDP is falling. Contractions are also known as recessions.
Cross country comparisons of GDP per capita typically use purchasing power parity equivalent exchange rates, which are a measure of the long-run equilibrium value of an exchange rate. In fact, we used PPP equivalent exchange rates in this module. Why could using market exchange rates, which sometimes change dramatically in a short period of time, be misleading?
Because market exchange rates can change dramatically in a short period of time, a comparison of GDP per capita between countries would give quite different results depending on the day one happened to choose. For example, suppose the GDP of Mexico is 10 trillion pesos. If the exchange rate on a particular day is 10 pesos per dollar, then Mexican GDP would be measured as $1 trillion. If on another day the exchange rate is 14 pesos per dollar, then Mexican GDP would be measured as $714 billion, which is almost 30% smaller. Hence it is best to use a long-run measure of the exchange rate.
Beginning in the 1970s and continuing for three decades, women entered the U.S. labor force in a big way. If we assume that wages are sticky in a downward direction, but that around 1970 the demand for labor equaled the supply of labor at the current wage rate, what do you imagine happened to the wage rate, employment, and unemployment as a result of increased labor force participation?
Because of the influx of women into the labor market, the supply of labor shifted to the right. Since wages are sticky downward, the increased supply of labor caused an increase in people looking for jobs (Qs), but no change in the number of jobs available (Qe). As a result, unemployment increased by the amount of the increase in the labor supply. This can be seen in the figure below. Over time, as labor demand grew, the unemployment declined and eventually wages began to increase again. But this increase in labor demand goes beyond the scope of this problem.
In the country of Ophir, the GDP deflator is 175. What does this tell us about prices now compared to prices in the base year? If nominal GDP in Ophir is $87,500, what is real GDP?
By definition, the GDP Deflator in the base year is 100. Consequently, prices are now 75% higher than in the base year. I.e., (175 - 100)/100 = 0.75 = 75%. To convert nominal GDP into real GDP, divide nominal GDP by the GDP deflator divided by 100. In this case, Real GDP = $87,500 divided by 175/100, or $87,500/1.75 = $50,000.
11. What are the main components of measuring GDP with what is demanded?
Consumption, Investment, Government Purchases, and Net Exports.
What causes cyclical unemployment?
Cyclical unemployment is caused by the contraction in GDP associated with the business cycle. When production falls, firms need fewer workers and so lay off employees.
12. What are the main components of measuring GDP with what is produced?
Durable Goods, Nondurable Goods, Services, Structures, and Changes in Inventories.
What are "efficiency wages?" Why might some employers pay efficiency wages?
Efficiency wages are wages above the equilibrium level that employers voluntarily offer. Such wages might increase labor productivity because they may reduce labor turnover, reduce shirking and theft, attract better workers, and induce greater effort.
What policies can the government of a free-market economy implement to stimulate economic growth?
Enforce property rights, provide public education, have low taxes, fund infrastructure projects, to name a few.
How might more generous unemployment benefits affect the natural rate of unemployment?
Europe provides evidence that more generous unemployment benefits reduce the incentive to find work. The result is a higher natural rate of unemployment.
While unemployment is highly negatively correlated with the level of economic activity, in the real world it responds with a lag. In other words, firms do not immediately lay off workers in response to a sales decline. They wait a while before responding. Similarly, firms do not immediately hire workers when sales pick up. What do you think accounts for the lag in response time?
Firms cannot predict the future. When sales decline, firms generally cannot know if the decline is temporary or if it will persist for some time. They do not want to lay off workers immediately because sales may pick up again soon. Likewise, if sales have been depressed for some time and then improve, firms will wait to see if the improvement is temporary or not before they hire new workers.
The Czech Republic has a GDP of 1,800 billion koruny. The exchange rate is 20 koruny/U.S. dollar. The Czech population is 20 million. What is the GDP per capita of the Czech Republic expressed in U.S. dollars?
First, convert Czech GDP into U.S. dollars: K1,800 billion/(K20/$1) = $90 billion. Then divide GDP per capita by population: $90 billion/20 million = $4,500
Given the limitations to GDP as a measure of the standard of living, why do economists still think that it is a "rough but useful" statistic?
For one thing, GDP per capita does reflect how much income people have. But in addition, countries with higher GDP per capita typically have higher standards of living as measured by other things such as health and life expectancy, education, environmental protection, and leisure time. So while GDP per capita per se does not capture everything that matters to people, it is highly correlated with many things that people care about.
What is frictional unemployment? Give examples of frictional unemployment.
Frictional unemployment exists because it takes time for unemployed workers to find a job. Modern economies are dynamic. Technological change, bad management, and changing consumer tastes cause firms to go out of business and cause workers to lose their jobs. In addition, there are always new entrants or re-entrants into the labor market, workers who quit their jobs, and workers who get fired. While these people are looking for work, they are frictionally unemployed.
Last year in the very small country of Shem, consumption spending was $10,000, investment spending was $2,000, government spending was $5,000 (including $3,000 in transfer payments), exports were $1,000 and imports were $2,000. In addition, residents of Shem working in other countries earned $750 and physical capital located in other countries owned by residents of Shem earned $500. Residents of other countries working in Shem earned $250 and physical capital in Shem owned by foreigners earned $250. What was GDP in Shem last year? What was GNP in Shem last year?
GDP = Consumption + Investment + Government Purchases + Net exports. Consumption was $10,000 and Investment was $2,000. Government Purchases are Government Spending minus Transfer Payments, so they are $5,000 - $3,000 = $2,000. Net Exports are Exports minus Imports, or $1,000 - $2,000 = - $1,000. So: GDP = $10,000 + $2,000 + $2,000 + (-$1,000) = $13,000. GNP = GDP + Income earned by residents of Shem from their labor and capital in other countries - Income earned by foreign residents from their labor and capital in Shem. So: GNP = $13,000 + $750 + $500 - $250 - $250 = $13,750
List some of the limitations to GDP as a measure of the standard of living
GDP ignores many things that matter to people. The GDP statistic does not reflect increases in leisure time, the quality of the environment, life expectancy and health, congestion, crime, quality of education, culture, and the number of options available for travel and entertainment. Things that people do at home (such as cooking) are not counted in GDP; to the extent that people purchase more of these things (such as eating out), GDP increases without there really being an increase in production.
Country A has export sales of $20 billion, government purchases of $1,000 billion, investment of $50 billion, imports of $40 billion, and consumption spending of $2,000 billion. What is the dollar value of GDP?
GDP is C + I + G + (X M). So in this case, GDP = $2,000 billion + $50 billion + $1,000 billion + ($20 billion - $40 billion) = $3,030 billion
Why doesn't the investment component of GDP include purchases of financial assets such as stocks and bonds?
GDP measures output of real goods and services. Stocks and bonds represent ownership and claims to income. Stocks and bonds may facilitate investment, but they are not goods and services.
Ethiopia has a GDP of $8 billion (measured in U.S. dollars) and a population of 55 million. Costa Rica has a GDP of $9 billion (measured in U.S. dollars) and a population of 4 million. Calculate the per capita GDP for each country and identify which one is higher.
GDP per capita in Ethiopia is $8 billion/55 million = $145.45. GDP per capita in Costa Rica is $9 billion/4 million = $2,250.00. Costa Rica has a much higher GDP per capita
What are the two main difficulties that arise when comparing standards of living in different countries using GDP?
GDP statistics from different countries are expressed in different currencies. So the first thing that must be done is to convert the GDP statistic into a common currency. A second problem is that countries have different populations. If GDP is used to compare standards of living, it must be converted into GDP per person.
Internships have become more common for college students. How might this affect frictional unemployment?
Internships serve the function of extended job interviews, and allow the firm and the intern to evaluate each other at length. Firms often hire their interns. The effect should be to reduce frictional unemployment.
What is the "adverse selection of wage cuts" argument?
If a firm cuts wages, the workers most likely to quit are its best workers. These workers have the best chance of finding jobs elsewhere. So if firms do not want to chase away their best workers, they will be reluctant to cut wages.
After several years of economic growth, would you expect the unemployment in an economy to be mainly cyclical or mainly due to the natural rate of unemployment? Why?
If there have been several years of economic growth, then the cyclical component of unemployment will most likely have been eliminated. What unemployment still remains must be frictional and structural, and therefore components of the natural rate of unemployment.
What happens to the labor force participation rate when employed individuals are reclassified as unemployed? What happens when they are reclassified as discouraged workers?
If they are reclassified as unemployed, there is no change in the labor force, and so no change in the labor force participation rate. If they are reclassified as discouraged workers, they are no longer part of the labor force; the labor force is smaller and therefore the labor force participation rate is smaller.
In 1980, Denmark had a GDP of $70 billion (measured in U.S. dollars) and a population of 5.1 million. In 2000, Denmark had a GDP of $160 billion (measured in U.S. dollars) and a population of 5.3 million. By what percentage did Denmark's GDP per capita rise between 1980 and 2000?
In 1980, Denmark's GDP per capita was $70 billion/5.1 million = $13,725.49. In 2000, Denmark's GDP per capita was $160 billion/5.3 million = $30,188.68. (30,188.68 - 13,725.49)/13,725.49 = 1.19946. So Denmark's GDP per capita was 119.95% higher in 2000 than in 1980.
Assume there are two countries: South Korea and the United States. South Korea grows at 4% and the United States grows at 1%. For the sake of simplicity, assume they both start from the same fictional income level, $10,000. What will the incomes of the United States and South Korea be in 20 years? By how many multiples will each country's income grow in 20 years?
In 20 years the United States will have an income of 10,000 x (1 + 0.01)20 = $12,201.90, and South Korea will have an income of 10,000 x (1 + .04)20 = $21,911.23. South Korea has grown by a multiple of 2.1 and the United States by a multiple of 1.2.
In the country of Aquilonia, the overall price level is rising at 3% per year. In the country of Nemedia, the overall price level is not changing at all. In both countries the demand for labor has fallen such that to avoid unemployment, inflation-adjusted wages need to fall by 3%. What would have to happen to the nominal wage for this to happen in each country? Which country would likely experience more unemployment? Why?
In Aquilonia, if wages stay the same they will lose 3% of their purchasing power because prices are rising by 3%. So if nominal wages remain the same, inflation-adjusted wages will fall by 3%. In Nemedia, where prices are stable, to reduce inflation-adjusted wages by 3%, the nominal wage must fall 3%. Because wages are sticky downward, it is likely that Nemedia will suffer more unemployment. This is an example of how low rates of inflation may actually help the economy
Describe some of the political and social tradeoffs that might occur when a less developed country adopts a strategy to promote labor force participation and economic growth via investment in girls' education.
In some cultures and religions, women are not supposed to become educated or work outside the home. To promote economic growth, a government might encourage women to become educated and work outside the home. Such a policy will meet with resistance, and in many places, violence. This illustrates that economic growth often requires cultural change. In many places, economic growth is held back because of an unwillingness to allow cultural change.
. Investment spending is only 15 to 18 percent of GDP, but it is extremely important to the overall health of the economy. Why?
Investment is the source of new physical capital. As we will see in Chapter 5, that is essential for economic growth. New factories and businesses as well as improvements to existing factories and businesses result from investment. That allows us to expand employment and production.
Are U.S. unemployment rates typically higher, lower, or about the same as unemployment rates in other high-income countries?
It depends on the country, but the U.S. typically has a lower unemployment rate than the average high-income country.
What does it mean to say that quarterly growth rates are reported "at an annualized rate?"
It means the actual growth rate for the quarter has been multiplied by four. If the economy grew at the same rate all year as it did in that quarter, it would be the yearly growth rate.
Say that the average worker in the U.S. economy is eight times as productive as an average worker in Mexico. If the productivity of U.S. workers grows at 2% for 25 years and the productivity of Mexico's workers grows at 6% for 25 years, which country will have higher worker productivity at that point?
It will help if we choose some specific numbers. At the start, say that the U.S. worker produces $80 per hour and the Mexican worker produces $10 per hour. In 25 years, average productivity in each country will be: In the U.S.: $80(1.02)25 = $80(1.64) = $131.20 In Mexico: $10(1.06)25 = $10(4.29) = $42.29 The U.S. will still have higher average worker productivity, but it will be 3.1 times Mexico's productivity, not 8 times.
How do gains in labor productivity lead to gains in GDP per capita?
Labor productivity is the value each employed person contributes per unit of time worked. Other things the same, as labor productivity rises, GDP per capita rises. The only other way to increase GDP per capita is to increase the share of the population working.
Explain how the amount of human capital per worker can affect labor productivity. Explain how the amount of physical capital per worker can affect labor productivity.
More human capital per worker implies that workers are better educated, better trained, more experienced, or some combination of these. All of these raise productivity. Think about a task such as building a table. Imagine how long it would take a well-trained, experienced carpenter to build a table compared to someone with no training or experience. More physical capital per worker means that workers have more and better tools. With more and better tools, workers can accomplish more in a given amount of time. Think about a skilled carpenter building a table. The carpenter could build the table in far less time if (s)he had power tools instead of hand tools.
Many college students graduate from college before they have found a job. When graduates begin to look for a job, they are counted as what category of unemployed?
New entrants to the labor force, whether from college or otherwise, are counted as frictionally unemployed until they find a job.
How did the Industrial Revolution increase the rate of economic growth and increase income levels?
New technologies like the steam engine allowed for power-driven machinery. Coupled with social and economic changes, this allowed for a self-reinforcing, positive cycle: The machinery led to higher productivity, which meant both higher wages and higher profits. That, in turn, created incentives for more investment in machinery and in new technology. The result was a first in recorded history: a sustained increase in the standard of living.
Is it desirable to pursue a goal of zero unemployment? Why or why not?
No. A zero unemployment rate would mean that people could not quit their jobs if they did not like them. It would also mean that firms could never lay-off workers; that means that obsolete industries would keep labor that is required in new industries. The effect would be to stifle technological change. Also, new entrants to the labor force would have to be assigned a job and so they could not find the job that fits them best.
Are all adults who do not hold jobs counted as unemployed?
No. Adults without jobs who are not looking for work are out of the labor force.
Would you expect the natural rate of unemployment to be roughly the same in different countries?
No. For example, the natural rate of unemployment is much higher in Europe than in the U.S. This is because many European countries have more generous welfare and unemployment benefits that discourage people from working. In addition, they have a variety of laws that make it difficult and expensive for firms to fire workers; the result is that firms are reluctant to hire workers.
Over the past 50 years, many countries have experienced an annual growth rate in real GDP per capita greater than that of the United States. Some examples are China, Japan, South Korea, and Taiwan. Does that mean the United States is regressing relative to other countries? Does that mean these countries will eventually overtake the United States in terms of rate of growth of real GDP per capita? Explain
No. It is potentially far easier for poor countries to grow rapidly than rich countries. One reason is they can borrow technologies that rich countries already have; rich countries must develop new technologies, which is far more difficult. Another reason can be found in the very nature of growth rates. Compare two countries, X and Y. X has per capita GDP of $1,000. Y has per capita GDP of $10,000. If both countries increase GDP per capita by $100, it will represent a 10% increase for country X (100/1,000) but only a 1% increase for country Y (100/10,000).
Would you expect the natural rate of unemployment to remain the same within one country over the long run of several decades?
No. Public policies regarding the labor market can change over time. The pace of technological change also varies over time. Technological change often destroys old industries and create new ones.
Do business cycles occur at regular intervals?
No. The length of contractions and expansions varies greatly. For example, in the last century the shortest contraction lasted only six months, while the longest contraction lasted 43 months.
Are U.S. unemployment rates distributed evenly across the population?
No. The young are more likely to be unemployed than the old. The less educated are more likely to be unemployed than the more educated (which is one reason you should study hard). Asians have a lower unemployment rate than whites, whites have a lower unemployment rate than Hispanics, and Hispanics have a lower unemployment rate than blacks. In recent years, women have had lower unemployment rates than men
What is the difference between a series of economic data over time measured in nominal terms versus the same data series over time measured in real terms?
Nominal values are measured with whatever prices existed at the time. Real values have been adjusted for inflation. For example, if the price of an item doubles over a period of time, the nominal value would double. But if the overall price level had also doubled, the good's price would not have changed relative to the prices of other goods. So the real value of the good would be unchanged.
Using the definition of the unemployment rate, is an increase in the unemployment rate necessarily a bad thing for a nation?
Not in every case. For example, as the economy improves, people who had been discouraged workers may start looking for work again. When this happens, the measured unemployment rate will rise temporarily. This is because they will again be counted as unemployed.
Is a decrease in the unemployment rate necessarily a good thing for a nation? Explain.
Not in every case. If unemployed workers become discouraged, the measured unemployment rate will fall.
Is the higher unemployment rates for minority workers necessarily an indication of discrimination? What could be some other reasons for the higher unemployment rate?
Not necessarily. For example, blacks, on average, are less educated than whites, and whites are less educated than Asians. That helps explain why the unemployment rate for blacks is higher than that of whites, and why the unemployment rate for whites is higher than for Asians.
Why do you think that unemployment rates are lower for individuals with more education?
One is that educated people are more likely to have skills that employers want. A second is that people with more education have demonstrated that they can set a long-term goal and achieve it; this is evidence of persistence and discipline, which are qualities that appeal to employers. A third is that educated people tend to be "better connected;" in other words they are more likely to know people similar to themselves who can alert them to job openings. A fourth is that educated people tend to earn more, and so are more motivated to find work than less-educated people.
Over the long term, has the U.S. unemployment rate generally trended up, trended down, or remained at basically the same level?
Over the long term, the U.S. unemployment rate has remained basically the same level.
Explain the difference between property rights and contractual rights. Why do they matter to economic growth?
Property rights are the rights of individuals and firms to own property and use it as they see fit. Contractual rights are based on property rights and allow individuals to enter into agreements with others regarding the use of their property, providing recourse through the legal system in the event of noncompliance. Economic growth occurs when output is increasing and incomes are rising. For this to happen, societies must create a legal environment that gives individuals the ability to use their property in its best use, including the right to trade or sell that property. Without a legal system that enforces contracts, people would not be likely to enter into contracts for current or future services because of the risk of non-payment. This would make it difficult to transact business and would slow economic growth.
Which statistic gives us a more accurate picture of how production changes over time, nominal GDP or real GDP? Why?
Real GDP. That is because real GDP changes only if production changes. Nominal GDP changes if either prices or production changes.
According to growth accounting studies, roughly how much of growth is attributed to technological change? How have these studies measured the effect of technology?
Roughly half of growth is from technological change. Technology cannot be measured directly, so its effects are measured by the "residual" left over after measuring the effect of additional physical capital per worker and human capital per worker.
What is the difference between being unemployed and being out of the labor force?
Someone who is unemployed is not working, but is looking for work. Someone out of the labor force is not working and not looking for work.
The Central African Republic has a GDP of 1,107,689 million CFA francs and a population of 4.862 million. The exchange rate is 284.681CFA francs per dollar. Calculate the GDP per capita of the Central African Republic in terms of dollars.
Start with Central African Republic's GDP measured in francs. Divide it by the exchange rate to convert to U.S. dollars, and then divide by population to obtain the per capita figure. That is, 1,107,689 million francs/ 284.681 francs per dollar / 4.862 million people = $800.28 GDP per capita.
What is structural unemployment? Give examples of structural unemployment.
Structural unemployment exists because some workers do not have the skills that employers want. Some people never acquire skills. Others discover that their skills have become obsolete because of technological change.
What do economists mean when they refer to improvements in technology?
Technology is our knowledge of how to do things. Technology improves when we figure out ways to increase productivity, to improve the quality of existing products, or produce new products. Note that individuals know only tiny bits and pieces of society's technology. Together as a society, we can build amazing things; as individuals we can build very little.
What criteria are used by the BLS to count someone as employed? As unemployed?
The BLS counts anyone working for pay as employed. People who are not working for pay but are actively looking for work are considered unemployed.
Explain what the Industrial Revolution was and where it began.
The Industrial Revolution refers to the widespread use of power-driven machinery and the economic and social changes that occurred in the first half of the 1800s. Ingenious machines like the steam engine, the power loom, and the steam locomotive performed tasks that would have taken vast numbers of workers to do. The Industrial Revolution began in Great Britain, and soon spread to the United States and Germany.
How might the Internet help reduce the amount of frictional unemployment?
The Internet should shorten job searches. Anything that improves the flow of information about available jobs and job candidates will reduce frictional unemployment.
U.S. macroeconomic data are thought to be among the best in the world. Given what you learned in the Clear It Up "How do statisticians measure GDP?" does this surprise you? Or does this simply reflect the complexity of a modern economy?
The U.S. economy is vast and complicated. It is an enormous task to collect all the data required to calculate GDP. The U.S. Bureau of Economic Analysis works very hard to get the best data it can, but as the discussion in the book makes clear, the system is far from perfect. One should think of all such statistics as educated guesses, not absolute fact.
As the baby boomer generation retires, what should happen to wages and employment?
The baby boom generation is an especially large cohort of workers. As they retire, the supply of labor will fall, all else equal. That should drive up wages and reduce unemployment. On the other hand, older workers tend to have a lower unemployment rate and higher wages. As baby boomers retire, the workforce as a whole will become relatively younger, which suggests higher unemployment and lower wages. In other words it is difficult to predict what will happen to wages and unemployment, all else equal.
Unemployment rates have been higher in many European countries in recent decades than in the United States. Is the main reason for this long-term difference in unemployment rates more likely to be cyclical unemployment or the natural rate of unemployment? Explain briefly.
The difference has to do with the higher European natural rate of unemployment. Many European countries have more generous welfare and unemployment benefits that discourage people from working. In addition, they have a variety of laws that make it difficult and expensive for firms to fire workers; the result is that firms are reluctant to hire workers.
The U.S. unemployment rate increased from 4.6% in July 2001 to 5.9% by June 2002. Without studying the subject in any detail, would you expect that a change of this kind is more likely to be due to cyclical unemployment or a change in the natural rate of unemployment? Why?
The factors that determine frictional and structural unemployment generally do not change significantly in a short period of time. So such a sudden increase in the unemployment rate is much more likely caused by cyclical factors (and it was).
What is the highest point of a business cycle called? The lowest point?
The highest point is called the "peak," and the lowest point is called the "trough."
What are the typical patterns of GDP for a high-income economy like the United States in the long run and the short run?
The long-run trend is for GDP to rise over time. In the short run, however, GDP can fluctuate up and down
What are the main factors that affect labor productivity?
The main determinants of labor productivity are human capital per worker, physical capital per worker, and technology.
Explain why wages are affected by labor productivity.
The more productive workers are, the more valuable they are to businesses. Businesses will offer to pay more to hire more productive workers.
Is the natural rate of unemployment primarily affected by short-run or long-run trends?
The natural rate of unemployment is driven primarily by long-run trends. Short-run events primarily affect cyclical unemployment; the natural rate of unemployment reflects frictional and structural unemployment.
What forces create the natural rate of unemployment for an economy?
The natural rate of unemployment is the result of a variety of forces. In a dynamic economy, some industries will be growing and others will be shrinking; it takes time for labor to move from one sector to another, and to acquire the new skills that are in demand. There are also public policies that affect the willingness of businesses to hire and the eagerness of people to work. More generally, the natural rate of unemployment is determined by all of the things that go into determining the frictional and structural rates of unemployment.
What term describes the remaining level of unemployment that occurs even when the economy is healthy?
The natural rate of unemployment.
Suppose the adult population over the age of 16 is 237.8 million and the labor force is 153.9 million (of whom 139.1 million are employed). How many people are "not in the labor force?" What are the proportions of employed, unemployed, and not in the labor force in the population? Hint: Proportions are percentages.
The population is divided into those "in the labor force" and those "not in the labor force." Thus, the number of adults not in the labor force is 237.8 - 153.9 = 83.9 million. Since the labor force is divided into employed persons and unemployed persons, the number of unemployed persons is 153.9 - 139.1 = 14.8 million. Thus, the adult population has the following proportions: 139.1/237.8 = 58.5% employed persons 14.8/237.8 = 6.2% unemployed persons 83.9/237.8 = 35.3% persons out of the labor force
Suppose there are two economies that begin with GDP equal to 100. Further suppose one economy grows at 1% per year and the other economy grows at 8% per year. Table 5.3 shows that in 50 years, the economy that grew at 8% per year will be more than 28 times as big as the one that grew at 1% per year (4,690/164 = 28.6). Explain why even though the growth rate was only eight times as big, one economy winds up 28 times as big as the other.
The reason is compounding. Each year the growth rate is multiplied by current GDP, but current GDP reflects past GDP growth. In our example, one economy's GDP after one year will be 101 and the other's will be 108. The gap after one year is 7. After two years, the first economy's GDP will be 102.01 and the other's will be 116.64, so the gap grows to 14.63. The country with the higher growth rate gets to apply that higher rate to a number that is getter larger and larger relative to the country with the lower growth rate.
How important is the rule of law for economic growth?
The rule of law is essential for growth. Countries without it simply do not grow. This is because without security of person and property, there is no incentive to acquire wealth by creating and building. Why should anyone work hard, get educated, save, or invest when thieves or corrupt officials will steal the fruits of their efforts?
Suppose that the countries of Aquilonia and Nemedia have the same GDP as measured in dollars. Further suppose that the population of Nemedia is twice the population of Aquilonia. Roughly speaking, what can you say about the standard of living of the average person in Aquilonia compared to Nemedia?
The two countries have the same GDP but Nemedia has twice as many people. Hence, GDP per capita is twice as large in Aquilonia as in Nemedia. GDP per capita is a rough measure of standard of living, so the standard of living in Aquilonia is roughly twice that of Nemedia.
A country with a population of eight million adults has five million employed, 500,000 unemployed, and the rest of the adult population is out of the labor force. What's the unemployment rate? What share of population is in the labor force?
The unemployment rate is 500,000/5,500,000 = 9.09%. The labor force participation rate is 5,500,000/8,000,000 = 68.75%.
Using the above data, what is the unemployment rate? These data are U.S. statistics from 2010. How does it compare to the February 2015 unemployment rate computed earlier?
The unemployment rate is defined as the number of unemployed persons as a percentage of the labor force or 14.8/153.9 = 9.6%. This is higher than the February 2015 unemployment rate, computed earlier, of 5.5%
How is the unemployment rate calculated? How is the labor force participation rate calculated?
The unemployment rate is the number of unemployed divided by the labor force. The labor force participation rate is the labor force divided by the adult (working-age) population.
What are some of the problems with using the unemployment rate as an accurate measure of overall joblessness?
There are a variety of things that make the unemployment rate a lessthan-perfect measure of unemployment. On the one hand, it may understate the true unemployment rate because: (i.) People who have given up hope of finding a job are not considered unemployed; (ii.) People working part time who really want to work full time are considered fully employed; and (iii.) People with advanced skills who are forced to settle for unskilled work are also considered fully employed. On the other hand, the measured unemployment rate may overstate the true unemployment rate because: (i.) Some people counted as unemployed may in fact be employed, but are working "off the books" or in the underground economy; and (ii.) Some people counted as unemployed may claim to be looking for work but are not really looking very hard; they should be considered not in the labor force.
Explain how improvements in human capital, technology, and physical capital might be related.
These three things are intimately related. When someone gets the idea to, for example, improve a machine, the new version does not yet exist in physical form. So the new physical capital must be produced in order to manifest the new technology. But before the improved machine can be productive, someone must be trained to use it; in other words, someone must acquire new human capital. So new technologies almost always require new physical and human capital.
Why do you suppose that U.S. GDP is so much higher today than 50 or 100 years ago?
This is a question we will answer more fully in Chapter 5. The short answer is that the U.S. now has better technology, more labor, and more capital.
Why do you think that GDP does not grow at a steady rate, but rather speeds up and slows down?
This is a question we will answer more fully in Chapter 8. For now, realize that the business cycle is the result of a variety of short-run shocks, including financial panics, changes in government policies, and the moods of consumers.
Say that the average worker in Canada has a productivity level of $30 per hour while the average worker in the United Kingdom has a productivity level of $25 per hour (both measured in U.S. dollars). Over the next five years, say that worker productivity in Canada grows at 1% per year while worker productivity in the UK grows 3% per year. After five years, who will have the higher productivity level, and by how much?
To calculate the answer, remember that: Starting Amount (1 + Growth Rate)Number of Years = Ending Amount In five years, productivity in Canada will be: $30(1.01)5 = $30(1.051) = $31.53 In five years, productivity in the UK will be: $25(1.05)5 = $25(1.276) = $31.90 So productivity will be higher in the UK by about $0.37.
An economy starts off with a GDP per capita of $5,000. How large will GDP per capita be if it grows at an annual rate of 2% for 20 years? 2% for 40 years? 4% for 40 years? 6% for 40 years?
To calculate the answer, remember that: Starting Amount (1 + Growth Rate)Number of Years = Ending Amount So under the various scenarios in the question we have: $5,000(1 + .02)20 = $5,000(1.49) = $7,450 $5,000(1 + .02)40 = $5,000(2.20) = $11,000 $5,000(1 + .04)40 = $5,000(4.80) = $24,000 $5,000(1 + .06)40 = $5,000(10.29) = $51,450
An economy starts off with a GDP per capita of 12,000 euros. How large will the GDP per capita be if it grows at an annual rate of 3% for 10 years? 3% for 30 years? 6% for 30 years?
To calculate the answer, remember that: Starting Amount (1 + Growth Rate)Number of Years = Ending Amount So under the various scenarios in the question we have: €12,000(1.03)10 = €12,000(1.34) = €16,080 €12,000(1.03)30 = €12,000(2.43) = €29,160 €12,000(1.06)30 = €12,000(5.74) = €68,880
How might trade contribute to higher labor productivity?
Trade allows for specialization, which raises productivity.
If many workers become discouraged from looking for jobs, explain how the number of jobs could decline but the unemployment rate could fall at the same time.
When unemployed workers become discouraged and stop looking for work, they are no longer considered unemployed. Consider an extreme case: suppose every unemployed worker becomes discouraged. In that case, the unemployment rate would fall to zero, because no one would be counted as unemployed!
Would you expect hidden unemployment to be higher, lower, or about the same when the unemployment rate is high, say 10%, versus low, say 4%? Explain.
When the unemployment rate is high, it is more likely that unemployed workers will give up looking for work. In addition, more workers will settle for part-time jobs or jobs that do not make use of their skills. Consequently, there will be more hidden (unmeasured) unemployment when the official unemployment rate is high.
What happens to the unemployment rate when unemployed workers are reclassified as discouraged workers?
When unemployed workers stop looking for work, the number of unemployed and the labor force both decrease. The unemployment rate is the number of unemployed divided by the labor force. Both numerator and denominator decline, but in percentage terms, the numerator falls more. Consequently, the measured unemployment rate falls. Consider this example: Suppose there are 800 employed people and 400 unemployed people. The labor force is 800 + 400 = 1,200. The unemployment rate is 400/1,200 = 33.33%. Now suppose two hundred of the unemployed people stop looking for work. That means that the number of people counted as unemployed falls by 200. The labor force falls to 800 + 200 = 1,000. The unemployment rate is then 200/1,000 = 20%, which is lower than it was before.
Are there other ways in which we can measure productivity besides the amount produced per hour of work?
Yes. Productivity is output per unit of input, so we can measure productivity using GDP (output) per worker (input).
Is it possible for GDP to rise while at the same time per capita GDP is falling? Is it possible for GDP to fall while per capita GDP is rising?
Yes. The answer to both questions depends on whether GDP is growing faster or slower than population. If population grows faster than GDP, GDP increases, while GDP per capita decreases. If GDP falls, but population falls faster, then GDP decreases, while GDP per capita increases.
Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change in the broad standard of living. a. The environment becomes dirtier b. The crime rate declines c. A greater variety of goods become available to consumers d. Infant mortality declines
a. A dirtier environment would reduce the broad standard of living, but not be counted in GDP, so a rise in GDP would overstate the standard of living. b. A lower crime rate would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the standard of living. c. A greater variety of goods would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the rise in the standard of living. d. A decline in infant mortality would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the rise in the standard of living.
. Which of the following are included in GDP, and which are not? a. The cost of hospital stays b. The rise in life expectancy over time c. Child care provided by a licensed day care center d. Child care provided by a grandmother e. The sale of a used car f. The sale of a new car g. The greater variety of cheese available in supermarkets h. The iron that goes into the steel that goes into a refrigerator bought by a consumer
a. Hospital stays are part of GDP. b. Changes in life expectancy are not market transactions and not part of GDP. c. Child care that is paid for is part of GDP. d. If Grandma gets paid and reports this as income, it is part of GDP, otherwise not. e. A used car is not produced this year, so it is not part of GDP. f. A new car is part of GDP. g. Variety does not count in GDP, where the cheese could all be cheddar. h. The iron is not counted because it is an intermediate good
Whose unemployment rates are commonly higher in the U.S. economy? a. Whites or nonwhites? b. The young or the middle-aged? c. College graduates or high school graduates?
a. Nonwhites b. The young c. High school graduates
What type of unemployment (cyclical, frictional, or structural) applies to each of the following: a. landscapers laid off in response to a drop in new housing construction during a recession. b. coal miners laid off due to EPA regulations that shut down coal-fired power c. a financial analyst who quits her job in Chicago and is pursing similar work in Arizona d. printers laid off due to a drop in demand for printed catalogues and flyers as firms go the internet to advertise their products. e. factory workers in the U.S. laid off as the plants shut down and move to Mexico and Ireland.
a. cyclical b. structural c. frictional d. structural e. frictional
Assess whether the following would be counted as "unemployed" in the Current Employment Statistics survey. a. A husband willingly stays home with children while his wife works. b. A manufacturing worker whose factory just closed down. c. A college student doing an unpaid summer internship. d. A retiree. e. Someone who has been out of work for two years but keeps looking for a job. f. Someone who has been out of work for two months but isn't looking for a job. g. Someone who hates her present job and is actively looking for another one. h. Someone who decides to take a part time job because she could not find a full time position.
a. out of the labor force b. unemployed c. out of the labor force d. out of the labor force e. unemployed f. out of the labor force g. employed h. employed.
