Question

Suppose the real GDP of an economy is $560 billion dollars and its unemployment rate is 8% If the natural rate of unemployment is estimated at 5%, what is the value of the country's potential GDP (LAS) in billions of dollars? Enter your response below rounded to 1 decimal place.

Answer 1

The student asked for the value of potential GDP based on an 8% unemployment rate when the natural rate of unemployment is 5%. The country is below full employment, and its real GDP is less than potential. However, without further information or specific formulas, the exact value of potential GDP cannot be provided.

Step-by-step explanation:

The student is asking about the relationship between the unemployment rate, potential real GDP (Gross Domestic Product), and the natural rate of unemployment. The key element in calculating potential GDP is understanding the concept of full employment, where the unemployment rate equals the natural rate. According to the provided information, the real GDP of a country at full employment should be equal to its potential GDP.

Given the current unemployment rate of 8% which is above the natural rate of unemployment (5%), we infer the country is not at full employment and therefore is operating below its potential GDP. To determine the potential GDP, we might use Okun's Law, which states that for every 1% increase in the unemployment rate above the natural rate, a country's GDP will be an additional 2% less than its potential GDP. However, as this approach is beyond the scope of the student's question, and more information like the GDP gap percentage is required, we cannot provide a specific value for potential GDP without further data.