Question

(a). In city XX the total population is 400,000 and the adult population is estimated at 200,000. Some 100,000 are employed full time, 55,000 are employed part time, while only 5000 where considered discouraged workers. The number of unemployed =20,000.

(i). Why is not all the adult population considered in labor force? (ii). What is the unemployment rate in city XX? (b). Real GDP is a popular variable to track the performance of the economy. Business managers however are also interested in tracking disposable income. Briefly explain why disposable income can be more relevant to a business manager than GDP.

Answer 1

a) i) Whole adult population is not considered as labor force because labor force includes only the adult population, which is either employed (both full or part time) or actively looking for jobs. These do not include the voluntarily unemployed or the ones who are discouraged workers.

ii) Unemployment rate= Unemployed/ Total labor force

=20,000/(20,000+150,000)*100

= 20,000/170,000*100

=11.76%

b) Real GDP takes into account inflation and hence is a good measure of productivity and growth. But business manager would be more interested in the disposable income because it reveals the actual purchasing power that is taken into account after taxes have been paid ie the income that the consumers or households would actually spend.

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