Question 1(a)1: Unemployment
Question 1(a)2: Non-Employment Ratio
Notice that our two graphs above look very similar, but in fact unemployment rate is not exactly the same as non-employment to population ratio. Note that unemployment rate measures the percentage of the labor force that is unemployed, while the non-employment to population ratio measures the percentage of total working-age population that is unemployed. In other words, the non-employment to population ratio accounts for unemployed persons not in the labor force, i.e. for whatever reason they are not looking for work, while unemployment rate does not include this group.
We also measure the change in these metrics during the COVID pandemic, comparing their peaks in April 2020 to recent lows in December 2020. The unemployment rate decreased from 14.8% to 6.7% in this time period, while the non-employment to population ratio decreased from 48.7% to 42.6% in this time.
Question 1(b)1. GDP
In our graph, nominal GDP increases faster than real GDP because nominal GDP scales with both total output/production and current price level, while real GDP only scales with total output/production while keeping price level constant, here held at the 2012 level. Because price levels tend to increase year-to-year (inflation), this results in nominal GDP growing faster than real GDP.
Question 1(b)2: GDP deflator
Question 1(b)3: CPI
Again, we see that the two graphs above are similar but not exactly the same. This arises because the GDP deflator accounts for the total of all output/production in the US economy, while the CPI measures output within a "basket" of common goods/services, i.e. it misses changes in good/services outside this basket which the GDP deflator will still capture.
Question 2. GDP measures for two-firm scenario.
We measure the value of final good/services produced. If we merge the two firms into one, we effectively produce \$300 worth of applesauce (from \$120 worth of apples from a totalof \$200), leaving \$80 worth of apples as a final product. The total value of final goods here is \$380.
We measure the sum of value added. Apple Company adds \$200 worth of apples, while Applesauce Company adds \$300-\$120 worth of applesauce, leading to a sum of \$380.
We measure the sum of incomes. This is equal to wages plus labor income (profits); Apple Company produces \$70 in wages and \$130 in profits, while Applesauce Company produced \$50 in wages and \$130 in profits. The total is \$380.
Question 3. Nominal and Real GDP measures.
- Nominal GDP for 2019 = $5110 + 1220 + 19010 = 2690$. Nominal GDP for 2020 = $560 + 1325 + 20010 = 2625$.
- Real GDP for 2019 = $5110 + 1220 + 19010 = 2690$. Real GDP for 2020 = $560 + 1225 + 19010 = 2500$. The percentage growth is $(2500-2690)/2690 = -7.1\%$.
- Real GDP for 2019 = $5110 + 1320 + 20010 = 2810$. Real GDP for 2020 = $560 + 1325 + 20010 = 2625$. The percentage growth is $(2625-2810)/2810 = -6.6\%$. The percentage growth changes when we adjust the base year because prices for different goods will change differently between the base years, producing uneven weightings for changes in production that determine the growth rate.