© 2013 Pearson
Potential GDP and
the Natural
Unemployment Rate
24
CHECKPOINTS
© 2013 Pearson
Click on the button to go to the problem
Checkpoint 24.1
Checkpoint 24.2
Problem 1
Problem 1
In the news
Problem 2
Problem 3
In the news
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Clicker
version
CHECKPOINT 24.1
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?
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CHECKPOINT 24.1
Solution
The demand for labor is a graph of
the first and third rows of Table 1.
The supply of labor is a graph of the
data in Table 2.
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CHECKPOINT 24.1
The production function is a
graph of the first two rows of
Table 1.
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CHECKPOINT 24.1
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 24.1
In the news
Chevron signs $73b gas deal
Gorgon, Chevron’s huge liquefied natural gas project, is
finally going forward. The company, along with Exxon
Mobil and Shell will produce natural gas off the northwest
coast of Australia. Gorgon and surrounding fields hold an
estimated 40 trillion cubic feet of natural gas, the
equivalent of 6.7 billion barrels of oil. Gorgon is located for
easy shipment to growing markets in China and India and
at its peak will employ 10,000 workers.
Source: Radio Australia, September 10, 2009
Explain how this huge project will influence Australia’s
potential GDP and U.S. potential GDP.
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CHECKPOINT 24.1
Solution
Accessing these new resources will shift Australia’s
production function upward.
With no change in employment, Australia’s real GDP
would increase.
But the project will increase the demand for labor,
increase the full-employment quantity of labor, and
increase potential GDP.
© 2013 Pearson
CHECKPOINT 24.1
Even though this project is undertaken by U.S. firms, the
production takes place in Australia.
Neither the U.S. production function nor the U.S. demand
for labor changes, so the project has no effect on U.S.
potential GDP.
Australia’s potential GDP will increase, but U.S. potential
GDP will not change.
© 2013 Pearson
CHECKPOINT 24.2
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?
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CHECKPOINT 24.2
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.
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CHECKPOINT 24.2
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?
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CHECKPOINT 24.2
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.
© 2013 Pearson
CHECKPOINT 24.2
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.
© 2013 Pearson
CHECKPOINT 24.2
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.
B.
C.
D.
E.
job rationing; job search; minimum wages
job rationing; job search; unemployment benefits
job search; job rationing; efficiency wages
job search; job rationing; minimum wages
job search; job rationing; rapid population growth
© 2013 Pearson
CHECKPOINT 24.2
Practice Problem 3
The figure illustrates the labor
market in an economy in which at
full employment, people spend
1,000 hours a day in job search.
What is the full-employment
equilibrium real wage rate and the
quantity of labor employed?
Calculate the natural
unemployment rate.
© 2013 Pearson
CHECKPOINT 24.2
Solution
At full employment, the equilibrium real wage rate and
the quantity of labor employed are determined by the
demand for labor and the supply of labor.
At full employment, the real wage rate is $3 an hour and
3,000 workers are employed.
Unemployment is 1,000, so the labor force is 4,000.
The natural unemployment rate equals
(1,000 ÷ 4,000) × 100 = 25 percent.
© 2013 Pearson
CHECKPOINT 24.2
In the news
The minimum wage increases again
A minimum wage increase provides a silver lining for parttime workers, as employers choose to promote more from
within the firm than from outside. Low-skilled and youth
workers who are employed gain, but for unemployed
teenage workers, job prospects look grim.
Source: laborlawcenter.com
Explain why some part-time workers, low-skilled workers,
and youth workers gain and why unemployed teenagers
find it hard to get jobs.
© 2013 Pearson
CHECKPOINT 24.2
Solution
When the minimum wage rate is raised, firms retain
those workers who produce at least as much output in
an hour as the minimum wage rate.
The job experience will help part-time and low-skilled
employees retain their jobs, but teenagers with no
experience will find it hard to get jobs.
© 2013 Pearson