Question

1. Identify and briefly explain the four types of unemployment identified by economic theory.

2. What is GDP? What are the two ways that GDP is measured?

3. The information below applies to a hypothetical economy.

Unemployment members of the labour force 2.3 million

Total population 15 years of age and over 58.9 million

Participation rate 64%

Workers with full-time jobs 21.4 million

Part-time workers who do not wish to have full-time jobs 4.2 million

Part-time workers who wish to have full-time jobs 3.5 million

Total population less than 15 years of age 14.6 million

Use the information to find the following:

a. the size of the labour force

b. the size of the labour force population

c. the official unemployment rate

d. an estimate of the unemployment rate that includes underemployment

4. Fill in the blanks to make the following statements correct.

a. If, when measuring Canada's national output, we add the market values of all firms' outputs in Canada, then we are committing the error of __________. Such an amount would greatly __________ the economy's actual output.

b. Statisticians use the concept of __________ to avoid double counting in measuring national income. Each firm's __________ is the value of its output minus the costs of __________ that it purchases from other firms.

c. If we measure GDP from the expenditure side, we are adding four broad categories of expenditure: __________, __________, __________, and __________. As an equation it is written as GDP = __________.

d. If we measure GDP from the income side, we are adding three main components of factor incomes: __________, __________, and __________. To these items we must add non-factor payments of __________ and __________.

Answer 1

Ans. 1

An Unemployment refers to the situation when people do not have a work and actively looking for job but are not able to find job. To measure the unemployment rate, we can just divide unemployed people by the number of people in labour force.

4 types of unemployment are -

1. Structural unemployment - This type of unemployment occurs when there is mismatch of workers skills and skills needed by employers, leading to structural unemployment.

2. Seasonal unemployment - People may be hired during special seasons than other months. It happens when there is huge demand for labour during certain season and after work is finished they become unemployed.

3. Demand Deficient Unemployment (Cyclical Unemployment) - when business demand less employees due to slowdown in the economy it is said to be demand deficient unemployment. Demand deficient unemployement happens when businesses does not able to find demand for there products and thus reduce workforce as cost cutting in business cycles.

4. Frictional Unemployment - when people leave their old jobs but haven't yet found new ones or currently looking for jobs, are currently counted as Frictional unemployed.

Ans 2.

GDP refers to the money value of all goods and services that are produced within the country during specified period of time. GDP is calculated on annual basis as well as on quaterly basis. Higher GDP reflects increase in national output, higher economic growth, more employment and better standard of living. GDP act as a tool for Investors, Businesses, government for investment and strategic decision making.

Two methods of GDP calculation are -

1. Expenditure method - The most widely used method to calculate GDP is expenditure method. This method aims to collect data on expenditure side by adding household spending, government spending, business investent and Net exports. Her expenditure on second hand goods are not part of GDP calculation.

GDP by Expenditure Method = Household consumption + Gross Business Investment + Government Spending + Net Exports (Export - Import)

2. Income method - In income method, we add all income that is generated by production of goods and services and by Businesses ie(land, labour, capital & profit)

GDP by income method = Compensation to Employees (wages & salaries) + Business profits + rental & interest income

Only those incomes that are come from the production of goods and services are included in the calculation of GDP by the income approach. We exclude:

Transfer payments e.g. the state pension; income support for families on low incomes; the Jobseekers’ Allowance for the unemployed and other welfare assistance such housing benefit and incapacity benefits

Private transfers of money from one individual to another

Income not registered with the tax authorities Every year, billions of pounds worth of activity is not declared to the tax authorities. This is known as the shadow economy.

Published figures for GDP by factor incomes will be inaccurate because much activity is not officially recorded – including subsistence farming and barter transactions