Question

1. When comparing the GDP of different countries, two issues immediately arise - currency and population differences. How does one account for these while comparing the GDP for different countries? Provide examples and explain your answer.
2. What is the "natural rate of unemployment"? Provide examples and explain your answer.

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Answer 1

When the Gross Domestic Product is estimated of different countries, a lot of other factors are to be considered when we compare GDP of two countries.

The two major issues is the currency which is different for different countries and population which varies across the globe. We can but account for these two by the following ways:

A) Convert the currency in to exchange rates: The exchange rate is the rate at which one country's currency is spent to get one unit of the other country's currency. This provides a common denominator of exchange rates to compare the GDP of the two country. For example 10 Yen might be spent to get 1 Euro. This gives you a chance to compare the currency of the two nations as well as the GDP with an inclusion of the Purchasing Power Parity.

B) GDP per Capita: The population part of the issue in comparing the GDP is solved by calculating the GDP per capita that is earned by citizens of the country. The GDP of the respective countries are divided by the total population of the two country and hence the amount each individual earns is compared. The standardization of each is done by comparing it with strong benchmark currency used in the market. For example, Let us take India and Pakistan, the GDP of India is 150 crores with 1500 crore, hence each GDP/capita is .1 crore. In Pakistan similarly it is just .5 lakhs/ capita in Pakistan, hence we can see that India has a better GDP than Pakistan.

2) Natural rate of unemployment : Natural rate of unemployment is the lowest rate of unemployment that a particular economy will reach due to real, voluntary and economic forces. It is natural rate because it is not due to the bad condition of the economy. It includes structural and frictional unemployment, where mobility or lack of skills result in unemployment. For example if A is moving to another town, without securing a job in the new town, he or she is not getting job because he or she did not search for the job. It is not that the government or the economy is not able to provide enough job opportunity. The citizens or the labor chooses to not have a job for personal reasons.