Question

3.1. Define “natural” unemployment.

3.2. What formula is used to calculate real GDP? Assuming nominal GDP is $100 billion and the Implicit Price Deflator (i.e. price index) is 110, calculate real GDP.

3.3. What factors impinging on a population’s wellbeing are not captured by GDP per capita?

Answer 1

3.1 natural unemployment is defined as that level of unemployment at which the economy operates on its potential level. So, the Unemployment corresponding to potential GDP is the natural Unemployment. Generally, Natural Unemployment= Frictional Unemployment+ Structural Unemployment

3.2 Fomula is given below:

Real GDP={ Nominal GDP/Implicit Price Deflator}×100

If Nominal GDP= $100 billion,

Implicit Price Deflator= 110

Real GDP= (100/110)×100= $90.91 billion

Real GDP is $90.91 billion

3.3 the following factors impinging on a populations wellbeing are not captured by GDP per capita:

• The income inequality prevailing in the society.
• Level of Health.
• Level of education.