Answer to Question #235691 in Macroeconomics for Uplinking Kelvin

Question

11. The economy of Naboo has a population of 10 million

people, of which 7 million are in the labour force. Three

(3) million people work in the construction sector, two (2)

million people work in the services sector, one (1) million

people work in the IT sector and one (1) million people

unemployed.

unemployed construction workers with respect to total

number of unemployed people is the same as the fraction

of employed construction workers with respect to the total

population. And the fraction of unemployed service

workers with respect to the total number of unemployed

people is the same as the fraction of employed service

workers with respect to the total population.

a. Suppose that the construction sector faces reduced

demand, and is forced to lay of 2 million workers. 1.5 million of them stay in the labour force while 0.5 million discouraged workers were laid-off. Calculate the unemployment rate in Naboo.

Answer 1

Initially, the size of the labor force was 7 million. When 0.5 million people became discouraged, the size of the labor force has reduced to 6.5 million. 

The total number of unemployed in the economy was 1 million. When 2 million people were laid off, the number of unemployed has also reduced by 2 million. However, since 0.5 million became discouraged, only, the remaining 1.5 million is added to the unemployed. Therefore the total number of unemployed people in the economy becomes 2.5 million.

The unemployment rate is calculated by dividing the total number of unemployed by the labor force and then multiplying by 100.

$Unemployment \space rate=\frac{Unemployed}{Labor\space force}×100\\=\frac{2.5 million}{6.5 million}×100\\=38.46\%$

Therefore the unemployment rate in the economy is 38.46 percent.