Question

Suppose the real GDP of an economy is $600 billion dollars and

its unemployment rate is 7%. If the natural rate of unemployment is
estimated at 4%, what is the value of the country’s potential GDP

Answer 1

The potential GDP of the country can be calculated using the formula Potential GDP = Real GDP / (1 - Unemployment Rate). Substituting the given values, the potential GDP is calculated to be $645.16 billion.

Step-by-step explanation:

The natural rate of unemployment is the unemployment rate that exists when the economy is at full employment. It is estimated to be 4% in this question. To find the potential GDP, we can use the formula:

Potential GDP = Real GDP / (1 - Unemployment Rate)

Substituting the given values:

Potential GDP = $600 billion / (1 - 0.07)
Potential GDP = $600 billion / 0.93
Potential GDP = $645.16 billion

Therefore, the value of the country's potential GDP is $645.16 billion.