The employment elasticity of the formal sector with respect to GDP is 0.4. If real GDP grows by 6% in a year, calculate the expected percentage change in formal sector employment. Show all steps.
Answer
2.4% increase in formal sector employment
The correct answer is 2.4% increase in formal sector employment — Interpret the result: formal sector employment is expected to rise by 2.4%.
Step-by-step solution
- Recall the formula: % change in employment = elasticity × % change in GDP.
- Insert the given values: elasticity = 0.4, % change in GDP = 6%.
- Multiply: 0.4 × 6 = 2.4.
- Interpret the result: formal sector employment is expected to rise by 2.4%.
Common mistake: Forgetting to multiply the elasticity by the GDP growth rate, or using the elasticity as a percentage directly.
Concept tested: Employment elasticity of GDP
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