Key Economic Concepts: Unemployment and GDP Explained

Posted on Apr 4, 2025 in Economy

Understanding Unemployment Types

Frictional Unemployment

This type of unemployment occurs when people are temporarily between jobs, searching for new ones, or entering the workforce for the first time.

  • Example: A recent graduate looking for their first job.
  • Example: Someone who voluntarily quit their job to find a better one.

Structural Unemployment

This results from a mismatch between the skills workers have and the skills demanded by employers, often due to technological changes, industry shifts, or geographical factors.

  • Example: A highly skilled worker whose industry has declined, requiring them to retrain for a different field.

Cyclical Unemployment

This type of unemployment is tied to the business cycle. It rises during economic downturns (recessions) and falls during periods of economic growth.

  • Example: A construction worker laid off during a recession when building projects decrease.
  • If the economy is operating at its full potential (full employment), there is no cyclical unemployment.

Key Unemployment Metrics

Natural Rate of Unemployment

Economists refer to the sum of frictional and structural unemployment as the natural rate of unemployment. This is the lowest rate of unemployment an economy can sustain over the long run without causing inflation to rise.

  • Formula: Natural Rate = Frictional Unemployment Rate + Structural Unemployment Rate
  • The natural rate is typically estimated to be around 4-5% in many developed economies.

Calculating Unemployment

An individual is considered unemployed if they are not currently working but are actively looking for work.

Note: If unemployed individuals stop actively looking for work (e.g., become discouraged workers), they are no longer counted as part of the labor force, which can cause the official unemployment rate to decrease even if employment hasn’t increased.

Labor Force

The labor force includes all individuals who are either employed or actively seeking employment.

  • Formula: Labor Force = Employed Individuals + Unemployed Individuals

Unemployment Rate

The unemployment rate measures the percentage of the labor force that is unemployed.

  • Formula: Unemployment Rate = (Number of Unemployed / Labor Force) * 100

Cyclical Unemployment Rate

This measures the deviation of the current unemployment rate from the natural rate.

  • Formula: Cyclical Unemployment Rate = Current Unemployment Rate – Natural Rate of Unemployment

Gross Domestic Product (GDP) Concepts

Defining GDP

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country’s borders during a specific period (usually a year or quarter).

What’s Included in GDP?

  • Final goods and services (not intermediate ones).
  • Capital goods (e.g., the value of a new truck purchased by a business for its operations).
  • Changes in business inventories. An increase in inventories adds to GDP. Example: If unsold inventory increases by 60,000 units valued at $100 each, $6,000,000 is added to GDP as inventory investment.
  • Consumption (C), Gross Private Domestic Investment (I), Government Purchases (G), and Net Exports (NX).

What’s Excluded from GDP?

  • Intermediate goods: Goods used up in the production of final goods (e.g., paper purchased by a publisher to print books).
  • Used goods: Sales of secondhand items (e.g., a used car).
  • Transfer payments: Payments made by the government for which no goods or services are received in return (e.g., social security benefits, unemployment benefits).
  • Financial transactions like stock purchases.
  • Non-market activities (e.g., household production).

Real vs. Nominal GDP

  • Nominal GDP: Measures the value of goods and services produced using current market prices.
  • Real GDP: Measures the value of goods and services produced using constant prices from a specific base year. This adjusts for inflation.
  • If nominal GDP increases but real GDP remains constant over a year, the increase in nominal GDP was due entirely to price increases (inflation).

Calculating Economic Indicators

GDP Expenditure Approach

One way to calculate GDP is by summing up spending on final goods and services.

  • Formula: GDP = Consumption (C) + Gross Private Domestic Investment (I) + Government Purchases (G) + Net Exports (NX)
  • Investment (I) includes fixed investment (spending on new capital goods like machinery and buildings) and changes in inventories. (Note: If inventory investment data isn’t explicitly given, sometimes you might need to infer it or choose the closest answer option if total GDP is provided.)

National Income

National Income represents the total income earned by a country’s residents and businesses.

  • Formula: National Income = Corporate Profits + Employee Compensation + Proprietors’ Income + Net Interest + Rental Income

Net Exports

Net Exports represent the difference between a country’s exports and imports.

  • Formula: Net Exports (NX) = Exports – Imports

Price Indexes and Inflation

  • Fixed-weighted price indexes (like the Laspeyres index) use a constant basket of goods from a base period. They can sometimes overstate inflation because they don’t account for consumer substitution away from goods whose prices have risen relatively more.

Calculating Percentage Change

To calculate the percentage change between two periods (e.g., year-over-year growth rate):

  • Formula: Percentage Change = [ (Current Period Value / Previous Period Value) * 100 ] – 100
  • Example: If (Current Value / Previous Value) * 100 = 113.23, the percentage change is 113.23 – 100 = 13.23%.

Relative Value Calculation (Goods X & Y)

To compare the relative value or price ratio of two goods (X and Y):

  • This often involves calculating the ratio of their total values (Price * Quantity) or just their prices, depending on the specific question.
  • The note “(Multiplica os dois, depois divide maior pelo menor e *100)” translates to “(Multiply the two [likely price and quantity for each], then divide the larger total value by the smaller total value and multiply by 100)”. This calculates how many times larger one value is than the other, expressed as a percentage.

Economic Policy Goals

Common macroeconomic goals include stable prices (low, steady inflation), full employment, and sustainable economic growth. Persistently low prices (deflation) are generally not considered a desirable policy goal.