Relationship between Output of the Economy and Unemployment - Example

Presented by Introduction The purpose of this paper is to presents the relationship thatexists between unemployment and the general out put of any particular economy; the case study for the purpose of this paper will be Canada. Subsequent sections of this paper will present the regression relationship that exists between the two concepts, GDP and unemployment. This will be done by formulating the regression model between the two countries. Source of data and variable definitions Okun, introduced the relationship between output of the economy and unemployment (Debs, 2001). He argued that one percent change in unemployment alters real output of the economy inversely by three percentage. His thoughts and findings have offered a corner stone to many policies makers in other different parts of the world. GDP is defined as the sum total of different components. The components are consumptions of both goods and services within the economy, the investments by the private sector, the government expenditure on different sectors of the economy, Capital investments for producing both goods and services. To get the GDP, all the components are added together with the net value of exports. There are three different methods of calculating the GDP of any particular economy. Production approach measures all the gross value of the output achieved in the domestic setup (Debs, 2001). The data arrived at is added to the intermediate consumption figure. This normally consists of different costs incurred in the production process. It only applies to the production of the finished goods. The figure is then differentiating from the value of the intermediate consumption. Income approach involves the summation of the income of all the individuals living within the borders of a country for a period of one year. The income is normally the price paid to the house hold for the services rendered in the course of production. It includes all the income both for the individuals and the corporate. The businesses that are none incorporated are also include in the calculation. Expenditure approach is the third method used. It involves the summation of all the expenses incurred by the individuals in the period of one year. The assumption is that all the goods produced in that particular economy are produced for the sake of being sold for profit. All the methods usually arrive at the same data and conclusion. It means that any of the methods can be used. Unemployment is the ratio that seeks to identity the prevalence of the number of people who are both wiling and cable of workings but are in one way or another unable to find work. It is calculated by finding the percentage of those with out jobs over the ones having jobs. Canada, just like any other country must adopt in the world, must have a progressive labor force, earned by the hours worked per hour and the general labor productivity (Blöndal,2001). Statistics have shown that the period proceeding the year 200 had a steady performance of the two components. After 200, the relative amount of hours worked rose whereas the relative productivity slumped. The gains in the relative number of hours worked has in essence offset deficient brought about by decline in the general productivity of labor. For the purpose of the analysis of this Paper will give the GPD of Canada using the expenditure approach technique. The country had a GDP of $ 1, 704,548 million and this marked around 0.1% increase from the previous quarter. Data for the 2011 2nd Quarter GDP Corporation profits before taxes 201,164 Government business enterprise profits before taxes 16,420 Interest and miscellaneous investment income 74,444 Accrued net income of farm operators from farm production 2,184 Net income of non-farm unincorporated business, including rent 107,796 Inventory valuation adjustment2 -836 Taxes less subsidies on factors of production 76,428 Net domestic product at basic prices 1,361,800 Taxes less subsidies on products 102,680 Capital consumption allowances 240,572 Data courtesy www.statcan.gc.ca The above Quarter’s GDP can be compared to 2012 2nd quarter which realized $ 1,762,576 million. It is therefore, self evident that the rate of unemployment in the two quarters must be inversely proportion to the growth in the GDP. In the year 2011, the statistics show that the country had unemployment rate of 7.6% in January that rose to 7.85% in Mach in the same year. In the third quarter, the unemployment rate shifted to 7.4. From that perspective, it is right to argue that the economy, more specifically the GDP rose as the number of people who involved in employment also rose. The rate then shifted to 7.3% in the third quarter and again rose by 0.01 % in the last quarter. From the data used in this analysis, it is evident that the rate of employment when months, increased by 1.3%. This represented 229,000 people who were able to secure full time jobs in the various sectors of the economy in Canada. In the same year, the labor force increased the number of working hours by 1.3% that translated to an improvement in the general productivity of the labor for the whole economy. The impact of such an act means that the GDP of the country for that particular year also rose as manifested in the improved performance by the labor force. Similarly, the employment rate grew in October in Quebec, Newfound land and the Labrador. The rate fell in other parts, most notably, Manitoba and British Colombia. The change witnessed in other provinces was negligible; they did not alter the whole presentation. The public sector of the country, in that quarter, witnessed and improved figure of employment rates. The impact was 37,000 people. The data was however, counterbalanced by a reduction of of the people employed in the private sector which includes both the people who hare self employed and those who have employment in the private sector. In a nut shell, the sector experienced a general improvement whereby the public sector had 74,000 which represents a 2.1% increase. On the same note, the private sector had 1.4% which represents the additional 157,000 people. Unlike other industries, the rate of unemployment declined in the month of October. GDP (Y) Unemployment rate (X)% XY XX Y2 1.1 7.8 8.58 60.84 1.21 0.6 7.4 4.44 54.76 0.36 -0.2 7.3 -1.46 53.29 0.04 1.4 7.4 10.36 54.76 1.96 Σ = 2.9 ΣX = 29.9 ΣXY = 21.92 ΣXX = 223.65 ΣY2 = 3.57 Y = a + b X + U Use the following equation as stated below to find a and b a = (2.9 X 223.65) – (29.9 (21.92)) / 3(223.65) – (29.9) 2 (648.585-655.408)/ 3 (223.65) – 894.01 -6.823/-2011.08 A=3.39 B=3 (21.92) – (86.71) / 3 (223.65) – 894.01 65.76 – 86.71 / -2011.08 B = 0.01 Y = 3.39 + 0.01X Y= GDP of the country for the selected quarter. A= the constant value which represents the change in Y (GDP) that is not dependent on the X (arte of unemployment. X= is the rate of unemployment for the selected quarter, B= the propionate change (rate at which unemployment rate affects the Gross Domestic Product of that country for the given quarter) Define Regressions Regression involves the mathematical representation of different variables, with regard to the relationship that exists between them. In regression analysis, there is usually a dependent and independent variable. On the same regard, the analysis helps in understanding how the dependent variable is affected by a shift in the independent variable. In this case, Y, which is the GDP, is the dependent variable, whereas X, which is unemployment rate, is the dependent variable. While carrying out the linear regression, there are some assumptions that have been made so that the data is found. The unemployment rate, which in this case is the predictor, is assumed to be made of different fixed values rather than random values. The different variables representing the X variable are also assumed to have a constant variance with regard to the error term. Linearity is assumed to apply to the whole model. The independent variable figures are assumed to have some errors that are not correlated. Hypothesis testing In hypothesis testing, the goal is to determine whether or not a hypothesis is true or false. For the sake of this paper, we will test whether or not Y, which GDP is dependent on the X, which is the rate of unemployment. H0 which is the null hypothesis states that a decrease in the rate of unemployment translated to an increase in the GDP. HA, is the alternative hypothesis state that a decrease in the rate of unemployment does not translate to an increase in the GDP. The next step is to carry out the calculations to support the null hypothesis just as done in the above presentation. From the model, it is evident that Y (GDP) is affected by the X (rate of unemployment). The discrepancies that may rise could be the fact an increase in GDP may be triggered by an increase in the unemployment rate. The reason for this could arise from the fact that GNP could have performed better leading to improved GDP after the deductions in the economy. References Blöndal, J. R. (2001). Budgeting in Canada. Paris: OECD Publishing. Debs, A. (2001). Testing for a structural break in the volatility of real GDP growth in Canada. Ottawa: Bank of Canada. www.statcan.gc.ca Read More