Question

1. Explain the terms Labor Force, Labor Force Participation Rate and Unemployment Rate. What is the relationship between these three measures?
2. What is a price index? Explain the terms Producer Price Index and Consumer Price Index. Is there any relationship between them?
3. What is Structural Unemployment? Identify two policies that governments can employ to address it.
4. Define Gross Domestic Product? Why does it exclude intermediate goods, second hand goods, and transfer payments?
5. Identify and explain three major limitations in using GDP as a measure of society’s well-being?

Answer 1

Labor force is the number of people who are employed as well as the people who are looking for job but not those people who are not looking for job.Some people get disappointed looking for job and so gives up looking for it are also not included in the labor force.

Labor force participation rate means the percentage of total population who are available for work.It was 63.2% in 2019. It means the number of people in the age group 16-64 ,who are employed and also those who are looking for job.

Unemployment rate shows the number of unemployed and is calculated as percentage by dividing the unemployed people by all the people in the labor force.

Labor force includes those who are employed as well as those who are unemployed .Labor participation rate measures the percentage of people in the labor force and unemployment rate measures the percentage within the labor force who are without the job.A high participation rate with low unemployment rate is a sign of good job market.

A price index is a average of price relatives for given goods or services in a given area for a given period of time.

Consumers price index and producers price index are economic indicators.Both measure fluctuations in prices but the difference is in the targetted goods and services and in the types of prices that are collected for the goods and services .CPI takes retail prices.CPI are the expenditures of urban and metropolitan areas, self employed,the poor ,the unemployed and the retired but does not  include rural areas.PPI measures the change in the sale prices of domestic market of goods and services. PPI takes into account whole sale prices.The industries that are included in PPI are mining ,manufacturing ,agriculture etc.

CPI is computed keeping in mind the retail price of goods that consumer consumes. But PPI is constructed keeping in mind the wholesale price of the products.Services are not included. CPI includes imports PPI do not. PPI is more general in nature.The main use of CPI is to adjust income and expenditure to measure changes in the cost of living and the main use of PPI is to deflate revenue so that the real growth in output can be measured.If the two are plotted in a graph we may find a general trend but the degree of change may differ as the constituents differ.

Structure unemployment takes place when the skills of the employees differs from the skills that the employers demand.

The policies that government can take are arrange training program for the structurally unemployed and by giving subsidies to firms that arrange for training programs so that the unemployed can move to areas where they get opportunity for employment.

GDP is the monetary value of all final goods and services produced in an economy in a year.While calculating GDP intermediate goods and second hand goods are excluded to avoid the problem of double counting.Transfer payments are not included because money gets only transferred without anything getting produced.In all these cases , nothing is produced in that year and so are excluded.

GDP is not a good measure of well being.It is a limited tool to measure the standard of living and does not take into account leisure time. Secondly it measures the cost of buying pollution control equipment but does not measure whether the air or water is clean or dirty.Thirdly,GDP does not measure the level of inequality in a country.