CAPF AC 2021 Q56: Indian Economy – National Income & Economic Growth
- (a) When the economy grows slowly than its potential, the unemployment rate rises.
- (b) Structural employment occurs when jobs are eliminated by changes in demand for particular goods or due to automation.
- (c) Recession in the economy leads to cyclical unemployment.
- (d) At full employment, the measured unemployment rate is negative.
Answer: (d) At full employment, the measured unemployment rate is negative.
Explanation
Types of unemployment
How to think: an unemployment rate is a share of the labour force.
A share can be zero at the lowest; it can never be negative.
Even at full employment some people are between jobs.
| Type | Cause |
|---|---|
| Frictional | People changing jobs or searching for the first one |
| Structural | Jobs lost to changes in demand or to automation; skills no longer match |
| Cyclical | Recession; demand in the whole economy falls |
Checking the four statements:
| Statement | Verdict |
|---|---|
| Growth below potential raises unemployment | True (this is Okun's law) |
| Structural unemployment comes from demand shifts or automation | True |
| Recession leads to cyclical unemployment | True |
| At full employment the measured rate is negative | False |
What full employment means: only cyclical unemployment is zero.
Frictional and structural unemployment remain.
This positive rate is called the natural rate of unemployment.
Answer: (d).
Why each option is right or wrong
- (a) Incorrect. This is true: slow growth below potential raises unemployment (Okun's law).
- (b) Incorrect. This is true: it is the textbook description of structural unemployment.
- (c) Incorrect. This is true: a recession causes cyclical unemployment.
- (d) CORRECT. This is wrong: at full employment the rate is positive (the natural rate), never negative.
Key point
Full employment = zero cyclical unemployment, not zero unemployment. Natural rate = frictional + structural. Okun's law links slow growth with rising unemployment.
Remember
Full employment still has the natural rate of unemployment.
Common mistakes
- Thinking full employment means that nobody at all is unemployed.
- Rejecting statement (b) because of its wording, though the description is correct.
- Mixing up structural (skills mismatch) with cyclical (recession) unemployment.
Exam tip
Educated guess: look for the statement that is impossible. A count of unemployed people cannot go below zero, so a negative rate cannot exist.
Sources
- Samuelson and Nordhaus, Economics — Unemployment and the Foundations of Aggregate Supply (Okun's law, kinds of unemployment)
- NCERT Class XII Economics — Introductory Macroeconomics (determination of income and employment)