Participate in a discussion with your classmates regarding natural unemployment.
ID: 1200697 • Letter: P
Question
Participate in a discussion with your classmates regarding natural unemployment. Review the “EYE on Your Life” caption titled, Natural Unemployment, on page 207 in the textbook. Now that we have learned that potential GDP is the value of real GDP when all the economy’s factors of production - labor, capital, land, and entrepreneurial ability - are fully employed, discuss how these factors render natural unemployment as productive when considering potential GDP. Please apply the production function and labor market concepts as explained in the textbook when sharing your discussion.
Explanation / Answer
Okuns law articulates natural unemployment as the level of unemployment that persists when the economy is operating at its full employment. It suggests that if actual GDP is equal to its potential, the only unemployment will be natural unemployment.
The natural unemployment is the unemployment that exists when the labour market is in equilibrium. There is pressure for neither rising inflation rates nor falling inflation rates.
An alternative term for this rate is the NAIRU or the Non-Accelerating Inflation Rate of Unemployment.