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Unemployment rate and economic growth

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You are hired as a business consultant to a Senator. She heard the association between the unemployment rate and economic growth, and asks you to estimate the relationship so that she could propose a policy to lower the unemployment rate.

Question: Given the relationship you estimated and the most recent GDP growth rate (most recently announced by the Bureau of Economic Analysis), how many years would it take to reduce the unemployment rate by 3 percentage points, assuming that the current GDP growth rate will continue into the future?

Background Information:
One of the most regular relationships in macroeconomic data is the relationship between the unemployment rate and the growth rate of real GDP. Specifically, the relationship is between the percentage-point change in the unemployment rate from one year to the next and the growth rate of real GDP:
Percentage change in Real GDp = ?-? (Percentage-point change in unemployment rate)
[Find the appropriate tables from the most recent Economic Report of the President
(http://www.gpoaccess.gov/eop/) and graph the relationship of the two variables.]

Steps:
1. To obtain data for this exercise, click list of statistical table under the most recent report and download.
2. After downloading real gross domestic product and civilian unemployment rate tables for this exercise, combine them into one file, and use only annual data.
3. In your graph, put the percentage-point change in unemployment rate on the horizontal axis and the GDP growth rate on the vertical axis, using Scatter Plot to plot the two series on a graph, and inserting the linear trend line (note that Excel gives you the relationship in the y= -?x + ? format).

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Solution Summary

The expert examines unemployment rates and economic growth. The most regular relationships in macroeconomic data and the relationship between the unemployment rate is determined.

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See Also This Related BrainMass Solution

Economic Indicators

How is the Economy Doing?

Required Reading:
St. Louis Federal Reserve National Economic Trends: This pdf data file illustrates national economic trends in six economic indicators for the past four years. Retrieved September 1, 2011.
http://research.stlouisfed.org/publications/net/page3.pdf

Look at the charts published by the Federal Reserve Bank of St. Louis, by clicking on the first link above. The following are descriptions of each chart. You can also consult the optional resources in the background material for this module.

Real GDP Growth

Gross Domestic Product (GDP) measures the dollar value of all goods and services produced in the U.S. economy in one year. The Department of Commerce Bureau of Economic Analysis measures the Gross Domestic Product by adding the spending in the consumer, investment (firms), government, and foreign (exports minus imports) sectors. While the current GDP can give us a good indication of current production, we must remove the effects of inflation from current GDP to compare the current figures to GDP numbers from other years. Real GDP is the current GDP divided by the GDP price deflator. The real GDP is one of the most important indicators of economic performance. A rise in real GDP indicates economic growth, while a fall in real GDP indicates economic decline.

Consumer Price Index (CPI)

The Consumer Price Index (CPI) measures the change in the overall cost of a variety of consumer goods and services. The Department of Labor Bureau of Labor Statistics measures the Consumer Price Index by creating a market basket of thousands of items purchased by consumers -- food, housing, clothing, transportation, medical care, recreation, education, communication, and energy. The prices of the specified products are measured each month, and the percentage change in price is reported as the Consumer Price Index. The Consumer Price Index generally increases during economic growth; during economic decline, the rate of price increase slows or prices may even decline.

Industrial Production

Industrial Production measures the output of American industry. The Federal Reserve Board of Governors measures Industrial Production by calculating the manufacturing output in the consumer goods, business equipment, construction supplies, materials, manufacturing, mining, and utility industries. Production is calculated in each sector monthly, and the percentage change in output is reported as Industrial Production. Durable goods, such as cars, appliances, and furniture, as well as construction supplies, tend to be more sensitive to economic changes than are other manufacturing products. Generally, Industrial Production increases during economic growth and falls during periods of economic decline. However, the 1999-2000 growth cycle suggests this is not always true. Interest Rates

Interest Rates

The Ten-Year Treasury Interest Rate measures the percentage return investors receive on U.S. Treasury bonds. The Federal Reserve Board of Governors measures Ten-Year Treasury Interest Rates, as determined daily in the bond market. Treasury Interest Rates can be indicative of changes in other long-term interest rates such as mortgages and long-term business loans. A decline in interest rates can precede increased investment spending to promote economic growth; high interest rates can lead to lower levels of investment and a decline in the rate of growth.

Change in Non-Farm Payrolls

The Change in Non-farm Payroll measures the number of people employed by companies and government. The Department of Labor Bureau of Labor Statistics surveys approximately 390,000 establishments to count the number of people employed each month, and the change from the previous month in the number of employed people is reported as the Change in Non-farm Payrolls. Non-farm Payroll generally rises during economic growth and falls during economic decline.

Unemployment Rate

The Unemployment Rate measures the percentage of people in the labor force who were not working during the week of the survey, but had specifically looked for work within the previous four weeks (unless they were waiting to be recalled from layoff, in which case they need not have been looking for work to be counted as unemployed). The Department of Labor Bureau of Labor Statistics surveys thousands of Americans each month to calculate the size of the labor force (those working plus those not working, but seeking work) and the unemployment rate (the unemployed divided by the labor force). The number of people unemployed as a percentage of the labor force is reported each month as the Unemployment Rate. The Unemployment Rate generally falls during economic growth and rises during economic decline. Use the chart above to see how the Unemployment Rate illustrates how our economy is performing. This chart was published by the Federal Reserve Bank of St. Louis.

When these indicators are analyzed in concert, the developing pattern can help to illustrate current economic performance. Periods of economic growth are often fueled by increased demand for economic products. This increased demand often causes GDP to increase, while simultaneously causing prices to go up. Firms increase their production to meet that increased demand, and often hire additional workers, increasing the payroll and reducing the unemployment rate. The increased demand for products can also result in increased demand for loans to purchase products, increasing interest rates. Recessions, on the other hand, are often fueled by a reduction in demand for goods and services. Firms reduce production in response, lowering GDP, and prices. Production cutbacks lead firms to lay off workers, increasing the unemployment rate. Reduced demand for loans can result in lower interest rates, and the Federal Reserve may further reduce interest rates in an attempt to stimulate spending in the economy.

Use the charts published by the Federal Reserve Bank of St. Louis to see how our economy is performing and answer the following essay in a 4-5 page essay:

1. For EACH indicator, explain the following:

-current status

-change from last year

-any trends?? (i.e. falling, rising, etc.)

-What do these results and/or trends suggest for the health of the economy?

2. Imagine that you are the Chair of the President's Council of Economic Advisors. You need to prepare a briefing for the president on the status of the economy. Based on the current performance of these indicators, write a 1-2 paragraph on how the economy is generally doing based on your answer to question #1. (for instance, determine if we are experiencing growth or decline)

3. Now imagine that the President wants to know what the economy's performance will be next year at this time. Based on the current performance of these indicators, try to predict the economy's performance next year.

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