Consider an economy with a labour force described by the fol

Consider an economy with a labour force described by the following table (in millions).

a. What is the labour-force participation rate? Show your calculations.

b. What is the unemployment rate? Show your calculations.

c. Suppose that the natural rate of unemployment is 6.6%. Use Okun’s law to determine the percentage by which actual GDP is above potential GDP.

Working AgeEmployedUnemployed Population 702.3 498.3 30.5

Solution

a.

Labourforce participation rate=(employed+unemployed)/Working age population

=(498.3+30.5)/702.3=.7595=75.95%

b.

Unemployment rate is ratio of number of people unemployed to total working age population.

Unemployment rate=30.5*100/702.3=4.34%

C.

Okun\'s Law—an economic ratio between unemployment and growth. Okun’s coefficient is .3 for developed economy, so 1% decrease in unemployment rate is associated with 3% increases in GDP.

Excess employment (above natural rate)=6.6%-4.34=2.66%

Excess growth is=3*2.66%=7.98%

So actual GDP is 7.98% higher than potential GDP.