Potential GDP and the Natural Unemployment Rate

8 Potential GDP and the Natural Unemployment Rate CHAPTER CHECKPOINTS

Checkpoint 8.1 Checkpoint 8.2 Problem 1 Problem 1 Problem 2 Clicker version

Practice Problem 1 Table 1 describes an economy’s production function and demand for labor. Table 2 describes the supply of labor in this economy. What are equilibrium employment, real wage rate, and potential GDP? CHECKPOINT 8.1

Solution The demand for labor is a graph of the first two rows of Table 1. The supply of labor is a graph of the data in Table 2. CHECKPOINT 8.1

The production function is a graph of the first two rows of Table 1. CHECKPOINT 8.1

Labor market equilibrium occurs when the real wage rate is $30 an hour and 2 billion hours of labor are employed. Potential GDP is the real GDP produced by the equilibrium quantity of labor (2 billion hours in top figure). Potential GDP is $70 billion. CHECKPOINT 8.1

Practice Problem 1 During the past 50 years, Singapore has experienced rapid population growth has restructured its economy several times to remain at the forefront of the latest technology. Singapore has modest unemployment benefits, no minimum wage, and weak labor unions. Does the unemployment that Singapore experiences arise primarily from job search or job rationing? CHECKPOINT 8.2

Solution Singapore’s unemployment is likely to arise primarily from job search. Of the sources of job rationing (efficiency wages, minimum wages, and union wages) only efficiency wages applies. CHECKPOINT 8.2

Practice Problem 2 During the past 50 years, Singapore has experienced rapid population growth has restructured its economy several times to remain at the forefront of the latest technology. Singapore has modest unemployment benefits, no minimum wage, and weak labor unions. Which of these factors suggest that Singapore has a higher natural unemployment rate than the United States? Which of these factors suggest that Singapore has a lower natural unemployment rate than the United States? CHECKPOINT 8.2

Solution The factors that point toward a higher natural unemployment rate in Singapore than in the United States are Rapid population growth and restructuring to remain at the forefront of new technologies. Both these factors will create a large amount of job search, other things remaining the same. CHECKPOINT 8.2

The factors that point toward a lower natural unemployment rate in Singapore than in the United States are Modest unemployment benefits, which will limit the amount of job search, and The absence of a minimum wage and weak labor unions, which will limit the amount of job rationing. CHECKPOINT 8.2

Study Plan Problem Singapore has experienced rapid population growth, restructured its economy several times, and has modest unemployment benefits, no minimum wage, and weak labor unions. Unemployment in Singapore arises mainly from ______, but some ______ might arise from _______. A. job rationing; job search; minimum wages B. job rationing; job search; unemployment benefits C. job search; job rationing; efficiency wages D. job search; job rationing; minimum wages E. job search; job rationing; rapid populationgrowth CHECKPOINT 8.2

Potential GDP and the Natural Unemployment Rate