NAIRU and GDP
To repeat,
- When unemployment is less than the NAIRU, inflation tends to speed up;
- When unemployment is more than the NAIRU, inflation tends to slow down;
- When unemployment is equal to the NAIRU, inflation continues at an unchanged rate.
Remember that unemployment is the proportion of the labor force who are not employed. Thus, corresponding to the NAIRU is a rate of employment, a proportion of the labor force employed, that also corresponds to a stable rate of inflation. We can multiply that rate of employment by the labor force to get the number of employees corresponding to a stable rate of inflation. Finally, multiplying that number by the average productivity of labor, we get the real GDP that corresponds to a stable rate of inflation. We could call this real GDP the
NAIRGDP -- the non-accelerating-inflation real gross domestic product. Restating the above list in terms of NAIRGDP, we see that
- When RDGP is more than the NAIRGDP, inflation tends to speed up;
- When RGDP is less than the NAIRGDP, inflation tends to slow down;
- When RGDP is equal to the NAIRGDP, inflation continues at an unchanged rate.
Answering Part of the Question
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