Students Again

Between July and August of 1997, total employment in the U.S. economy rose from 129,708,000 to 129,804,000 – an increase of 96,000. At the same time, the unemployment rate rose from 4.8% to 4.9%.

a) How can unemployment rise when the number of employed is also rising?

The unemployment rate has risen even though the number for employed also rose is because the number of people unemployed has increased greater than the number of employed. According to the calculation of the unemployment rate: unemployment rate =  (unemployed / labor force) x 100, the larger amount in the numerator (unemployed) relative to the denominator (labor force) will give an overall larger unemployment rate. More people have become unemployed than the number of employed in the labor force.

b) If 6,677,000 were unemployed, calculate approximately how large the labor force was in August.

unemployment rate = (unemployed / labor force) x 100
0.049 = (6,677,000 / labor force)
Labor force = 6,677,000 / 0.049
Labor force = 136,265,306

In August, 1997, economists were saying that the U.S. economy was close to full employment even though the unemployment rate was 4.9%. How can they make this assertion?

Economists can make this statement because they most likely have the information of the different types of unemployment. When being fully employed, the economy is only experiencing frictional (search and wait workers) and structural (skills/experience becoming obsolete workers) unemployment. There is no cyclical unemployment. Cyclical unemployment occurs then there is a decline in total spending and usually occurs in a recession. Most likely in August, the economy was not experiencing a recession.

Why do we bother to construct real GDP is we already know nominal GDP?

Real GDP reflects the changes in price level. Nominal GDP has not been adjusted to reflect the changes in prices. It is based on prices that existed when the goods and services were produced at a certain time. If real GDP was not considered, then there could not be a comparison of the market values of GDP from year to year because the nominal GPD does not consider the prices falling or rising. Real GDP would allow comparison and measure of GDP in different years by keeping the value of the dollar at the same level for those years being compared.

Which of the following transactions would not be counted in GDP? Explain your answers.

a) GM issues new stock to finance the construction of a new plant.

The buying and selling of the stock issued would not be considered part of GDP because it does not create or contribute to current production. However, the payment of service to buy and sell those stocks would be part of the GDP calculation. The expenditure cost of constructing the new plant would be considered part of GDP because it id considered and investment. Depreciation on the new plant would be considered part of GDP. These additions to the GDP calculation depends on the method used – expenditure or income.

b) GM builds a new plant

This is counted toward the calculation of GDP because it is a capital expenditure. The depreciation on the plant would also be considered in the calculation.

c) Company A successfully launches a hostile takeover of company B, in which it purchases all the assets of company B

Company A expenditure cost to obtain the assets from company B would be considered. It is considered capital investment. The profits from the sale of company B’s assets to company A would be included in the GDP calculation. These additions to the GDP calculation depends on the method used – expenditure or income.

d) Your grandmother wins $10 million in the lottery

Her lottery win would be considered in the calculation of GDP. It is considered part personal income as a transfer payment. Even though not earned like wages, it is part of the calculation.

e) You buy a new copy of your textbook

This would be included in the calculation of GDP because it is a purchase of a durable good.

f) You buy a used copy of your textbook

This would not be included in the calculation of GDP because generates not current production. It is considered a second hand sale. The original cost and income from the new book would be considered depending on the method used – expenditure or income.

g) The government pays out social security benefits

Social Security benefits that are paid out by the government would not be considered part of GDP because it is considered financial public transfer payment. However the income from the social security payments to the individual would be added to the calculation of GDP. This would be part of personal income.

h) A public utility installs new anti-pollution equipment in its smokestacks

The cost of the expenditure of installing the equipment would be considered part of GDP calculation because it is a good and service that the government consumes in providing public service.

i) A pizzeria buys 30 pounds of cheese one month and then uses it to produce pizzas the next month

The income from producing the final good would be part of GDP calculation. All intermediate steps to produce the good are not calculated individually in the GDP calculation. All cost is included in the value of the final product. This is done to avoid multiple counting.

j) You spend your entire weekend cleaning your apartment

This is not considered part of the calculation of GDP because there is no monetary value accessed to it.

k) a drug dealer sells $500 worth of illegal drugs

This would not be considered since it is not legal and not tracked as one of the components of the calculation of GDP.

What can government do to reduce the number of people unemployed for the following reasons (if anything)?

a) Seasonally unemployed

Nothing. Seasonal unemployment occurs every year at the same time. Unless the government can prolong the Christmas season throughout the year, seasonal unemployment can not be reduced by the government.

b) Structurally unemployed

The government can provide financial aid for classes and programs to individuals to update and hone their skills. If the skills of the unemployed due to structural unemployment are changed and enhanced quickly, then structural employment can be reduced.

c) Frictionally unemployed

The government could add more jobs for these people to quickly reduce the time it would take to obtain a job.

d) Cyclically unemployed

The cyclically unemployed workers are a result of a recession. The government could add more jobs to provide work. They could provide grants for companies for research and devolvement. This in turn would require more employees. They also can provide more financial aid for individuals to go back to school to obtain new knowledge to transition into a more secure job.

Why has nominal GDP risen faster than real GDP in recent times? What would it mean if Real GDP rose faster than nominal GDP?

Nominal GDP risen faster that real GDP in recent times because prices of products produced has risen faster that the amount needed to inflate the GDP. If real GDP rose faster than nominal GDP then that would indicate that the changes in price level has risen greatly and the GDP has to increase to reflect those changes.