Question

Complete the questions below that are based on your chapter readings. Submit your answers in a M on Sunday of Unit 2 or as directed by your professor. ft Word document (no PDPs) by 11:00 p.m 1. Consider the macroeconomic data shown Real GDP (billions of s output Gap Unemployment Rate |(% of labour force) ns YEAR Actual Potential 1192 2004 1188 1200 1209 1219 1226 1240 2009 1257 1251 1262 1274 (% of potential) 2003 11721 11.0 10.0 9.0 8.2 7.6 7.2 7.1 2005 1201 2006 1215 2007 1230 2008 1244 7.3 2010 1269 2011 1274 a. Compute the output gap for each year b. In several years actual GDP exceeded potential GDP. Explain how GDP can exceed potential GDP c. In this example, real GDP has not fallen from year to year but at times it happens. When real GDP falls from year to year what this time? economists call such periods?

Answer 1

a. Output gap as a percentage of potential can be known by (Actual Output - Potential output / potential output) * 100
Output gap is as follows:
2003 = -1.677 % (1172-1192 / 1192 *100)
2004 = -1 % ( 1188-1200/ 1188*100)
2005 =- 0.66 %     (1201-1209/1209 *100)
2006 =- 0.32 % (1215-1219/ 1219 *100)
2007= 0.32% (1230- 1226/ 1226*100) and so on
2008 = 0.322 %
2009= 0.479 %
2010 = 0.55 %
2011 = 0

b. In several year like 2007, 2008, 2009, 2010 actual GDP exceeds potential GDP. When It happens this is because of rise in general price level. When actual exceeds potential, it creates inflationary gap.
c. When real GDP falls year after year, economists call this period recession.
d. Unemployment rate in year 2011 when economy at full employment (Actual GDP= Potential GDP) is 7.6%. It is interesting to note that this scenario depicts natural unemployment where only structural (mismatch between skills some workers provide and what economy wants) and frictional (people who are in between jobs)unemployment prevails.