Question

7. Differentiate between the following terms: a) Unemployed worker and discouraged worker. b) Currency appreciation and currency depreciation. c) Purchasing power parity and interest rate parity. d) Current account and capital account.

Answer 1

a. The unemployment rate is officially defined as a percentage of the labor force that is unemployed. An alternative measure of the BLS reported unemployment rate is the U-4 rate, defined as unemployed workers plus discouraged workers as a percentage of the work force plus discouraged workers. When people aren't working, but are constantly looking for a job; Glenn, for example, didn't work at all last week, but he tried to find a job, so he's considered unemployed.

Discouraged employees are those who want to work and are at their side, but have fallen out of the workforce because they feel there are no jobs. There were 368,000 in July 2019. Sometime in the past year, they've been looking for a job, but not in the past four weeks. If it was offered, they could take a job. They'd have already returned to the workplace in most recoveries. We haven't been in this rehab. Discouraged workers do not include those who for other reasons have dropped out of the workplace. These are individuals who have returned to school to boost their job opportunities. Many women are leaving the workforce because they have become pregnant. Many citizens are unable to function because they are injured. Even though they may also feel depressed, they are not known to be frustrated employees.

b. Currency depreciation refers to a foreign currency decrease in the value of the domestic currency. This makes the domestic currency less competitive, so purchasing the foreign currency needs more of it.
Domestic currency depreciation means a fall in the domestic currency price in foreign currency terms This means more goods can be imported from India with the same amount of dollars, i.e. imports to the United States would rise as they become relatively cheaper. Currency Appreciation refers to the foreign currency value of the domestic currency. The domestic currency is becoming more competitive and buying the foreign currency demands less. Domestic currency appreciation means an increase in domestic currency prices in foreign currency terms Today, one rupee can be exchanged for more dollars, i.e. with the same amount of money, more products can be bought from the USA. As American exports are relatively cheaper, this leads to an increase in imports from the U.S.

c. Purchasing power parity (PPP) is an economic theory that contrasts the currencies of different countries by means of a "goods basket" approach. According to this definition, if a basket of products (taking into account the exchange rate) is priced the same in both countries, two currencies are in equilibrium or equivalent. Interest rate parity is a concept where the interest rate differential is equal to the difference between the forward exchange rate and the spot exchange rate. The PPP is based on spot prices, whereas both forward and forward interest rates are based on the IRP. The PPP is used to measure any economy's GDP in a broader term, whereas the IRP is directly concerned with that currency's PPP.

d. Current and capital accounts are two halves of the balance of payments of a country. The current account reflects the net income of a country over a period of time, while the capital account reports the net change of assets and liabilities over a given year. The current account deals with receipt and compensation of cash as well as non-capital products in economic terms, while the capital account represents sources and capital use. The balance of payments amount of the current account and capital account will always be zero. Any current account surplus or deficit is offset and balanced by an equivalent capital account surplus or deficit.