1.Consider the following hypothetical economy with a population of 20 million. T

Question

1.Consider the following hypothetical economy with a population of 20 million. There are 7 million people working full-time, 2 million people working part-time, 1 million people who are actively seeking work but currently unemployed, and 2 million discouraged workers who have given up looking for work and are currently unemployed.

a.What is the economy’s unemployment rate?

b.If there are 13 million adults that are eligible to work in this economy (they might or might not have currently have a job), what is the labor force participation rate?

c.Suppose you learn that the unemployment rate has decreased in the following month. Why should you be cautious about interpreting this as a sign of economic growth?

Explanation / Answer

a)

Unemployment Rate = Unemployed / Labor force.

Unemployed People = 1/ 7+2

= 11.11 %

b)

Labor force participation Rate = Labor Force / Adul population.

= ( 7+2+1) / 13

= 10/13

= 76 %

c)

Unemployment might fall owing to significant rise in the discouraged workers. Hence, government underestimates actual size of unemployment in economy. Hence, we should not jump to conclusion that fall in unemployment rate means higher growth rate.

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