Question

You are hired by the government of a small country to conduct some economic analysis. You are given the data that you can see in the file HW2 GDP Calculation. The country produces only three goods. The national income accountants have chosen 2012 as the base year. They also give you a few pieces of information listed below for you to be able to carry out your assignment.

1. In the base year, there was no cyclical unemployment.
2. The natural rate of unemployment is constant and equal to 5%. The natural rate is solely due to frictional reasons.
3. Potential GDP in this country does not change (no population growth, no capital growth, no technological advances).
4. Okun's Alpha equals 2.

Calculate the following:

• GDP gap in 2013 = _____ percent.
• GDP gap in 2014 = ______ percent.
• Cyclical rate of unemployment in 2013 = ____ percent.
• Cyclical rate of unemployment in 2014 = ____percent.
• Overall rate of unemployment in 2013 = _____ percent.
• Overall rate of unemployment in 2014 =   percent

Answer 1

2*change in Cyclical unemployment=- gdp growth{ okun's law

Gdp2012=10*1160+20*260+40*80=11,600+5200+3200=20,000( potential gdp)

GDP 2013=10*1171.6+20*262.6+40*80.8=20,200

GDP2014=10*1113.02+20*249.47+40*76.76=19,190

Gdp gap 2013=(20,200-20,000)/20,000]*100=1%

Gdp Gap 2014=(19,190-20,000)/20,000]*100=-4.05%

Cyclical unemployment 2013=-1/2=-0.5%

Growth rate in 2014=(119,190-20,200)/20,200]*100=-5%

So change in Cyclical unemployment rate=-(-5/2)=2.5%

Cyclical unemployment 2014=-0.5+2.5=2%

Overall unemployment 2013=5-0.5=4.5%

Overall unemployment 2014=5+2=7%