Question

For every 1% increase in

unemployment, there is a 2%

decrease in potential GDP. This

creates a GDP gap. What is the GDP

gap when there is 4.5%

unemployment?

Answer 1

The GDP gap is 9 % when there is 4.5 % unemployment.

Explanation:

The statement shows a reverse relationship, where an increase in unemployment is following by decrease in potential GDP and can be translated into the following rate:

`r = (2\,\% \,GDP)/(1\,\% unemp.)`

The GDP gap at a given increase in unemployment can be estimated by the following expression:

`(g)/(u) = r`

`g = r\cdot u`

Where:

`r` - GDP gap-unemployment increase rate, dimensionless.

`u` - Increase in unemployment rate, measured in percentage.

`g` - GDP gap, measured in percentage.

If
`r = (2\,\% \,GDP)/(1\,\% unemp.)` and
`u = 4.5\,\%\,unemp.`, the GDP gap is:

`g = \left((2\,\%\,GDP)/(1\,\%\,unemp.) \right)\cdot (4.5\,\%\,unemp.)`

`g = 9\,\%\,GDP`

The GDP gap is 9 % when there is 4.5 % unemployment.