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GDP and Unemployment by Mark Branstrator
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GDP and Unemployment |
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Business,Business News,Current Affairs
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We know that when there is unemployment, the economy is not producing at full output since there are people who are not working. But, what exactly is the relationship between unemployment and national output or GDP? How much would we expect the GDP to increase if unemployment fell just 1%? Real GDP is a measure of the economic output of a country. The absolute measure only tells you what that output was for a particular period. The more important measure for employment is the difference between real GDP and a theoretical real GDP which economists use to calculate the maximum output of an economy. When the gap between real GDP and maximum output GDP is large, the unemployment rate will be large and vice versa. There is little in the realm of economics more feared by the average consumer than unemployment. Understanding what unemployment really is and how it works is important both for the economist and for the consumer. Since most people rely on their income to maintain their standard of living, the loss of a job will often directly threaten to reduce that standard of living. This creates a number of emotional problems for the worker and the family. In terms of society, unemployment is harmful as well. Unemployed workers represent wasted production capability. This means that the economy is putting out less goods and services than it could be producing. Total output declines. It also means that there is less money being spent by consumers, which has the potential to lead to more unemployment, beginning a cycle. Okun's Law relates the percentage change in real GDP to changes in the unemployment rate. This equation basically says that real GDP grows at about 3% per year when unemployment is normal. For every point above normal that unemployment moves, GDP growth falls by 2%. Similarly, for every point below normal that unemployment moves, GDP growth rises by 2%. This equation, while not exact, provides a good estimate of the effects of unemployment upon output. With lower employment, lower total hours worked and jobs declining in sectors that perform poorly during recessions, such as manufacturing, unemployment is clearly pointing to a recession. In addition, these figures would also point to lower retail sales, industrial production and real income, which would lead to a lower GDP. More recently, the new statistic is that the federal government is taking in 18% less tax revenue than it usually does, which severely impacts and limits its ability to spend on programs and pay back debt. When employment levels are low, there is no doubt that tax revenue will fall, it is a certainty. These are all ways in which GDP is affected by unemployment, though maybe not complete, it is surely the foundation.
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