This article will talk about the inverse relationship between GDP and Unemployment essentially when one is high the other one is low and vice versa. We will start this with a quick recap on GDP; there are many people out there that know of GDP but do not know what it calculates and the variables that it has. First off the GDP stands for Gross Domestic Product and it was invented by a British economist named John Maynard Keynes in 1940. It consist of 4 variables which are Consumption + Investment+ Government+ Net Export which are denoted as C+I+G +(-) NE. Those Four variables make up 100 % of the GDP but they all don't contribute equally as a matter of fact consumption(C) makes up around 70 % of the total pie you may have heard before that the U.S. is a service type of economy and services are consumptions. GDP is calculated in Two ways by either income or expenses, which you can state as income=expense meaning for every dollar that you spend it becomes income to someone else another example when you work the paycheck you get is income to you but its an expense to your company but they always equal each other.
The other side of the coin is unemployment which is calculated as [# number of unemployed / labor force X 100] the Labor Force is the sum of unemployed and employed together. One thing to note here is that the unemployed means people who are actively looking for a job, so if you are looking for a job then you are unemployed but if you stop looking for a job then you are no longer counted as being unemployed. If you think about it now you can see why the Unemployment rate sometimes misstates the true state of the economy because you might get frustrated at not being able to find a job and stop looking but your still unemployed but since you stop looking you are no longer counted in the unemployment rate formula, therefore you will count as 1 less person under unemployment.
I have given you the definition and proper way to calculate both GDP and unemployment now you might be asking why are they inverse? Easy you see when the GDP is high and the country is growing at a good pace then unemployment must be low if you go back to our original calculation of GDP as income=expense then it makes sense a high growth rate of GDP must mean that there is low unemployment since incomes are higher and people are spending more. I must also let you know that it is calculated every 3 months (4 times a year) or quarterly and then they put it together the average growth rate and come up with an annual gdp growth ratio. One of the big reasons why GDP continues to growth is simply because our population continues to grow so now you have more people who can work and also it continues to grow because of advancement in technology which creates more jobs and makes people more efficient. A good example of good use of technology is the internet which is relatively new if you go back 15-20 years the internet was unheard of but now that it is so common and exploded in growth it has created many jobs and allowed companies to become a lot more efficient and to expand while keeping cost lower. I hope you learned something from this article the material was easy but it's a lot of information reread this a couple of times and things will start to clear up.
