Question

1. Do you think there is a causal (meaning changes in one variable cause changes in the other variable) relationship between GDP growth and unemployment rates? If so, please explain exactly how the mechanism of causality works… i.e. Why does a change in one variable cause the change in the other? Think hard here, for yourself, and absolutely DO NOT search the internet for help. Think deeply about the real activities that each variable is measuring and summarizing, and how these activities are related to each other.

Answer 1

Of course there is casual relationship between unemployment and GDP growth. When unemployment decreases, more people get jobs and engage in economic activities(in production of goods and services). As a result, production in the economy increases. Labour is an input in production of almost every good and service. As more labour is absorbed due to employment increase, production increases. When production increases, the Gross Domestic Product, which is a measure of final value of goods and services produced within the domestic territory of the country, increases. This, in turn, leads to GDP growth. Therefore, when unemployment decreases(employment increases), GDP growth would increase.

If, on the other hand, unemployment increases, then GDP growth would slow down.