The employment elasticity of total employment with respect to real GDP is 0.25. If real GDP expands by 3 % in a year, what is the expected percentage change in total employment? Show all steps.
Answer
The expected increase in total employment is 0.75 %.
The correct answer is The expected increase in total employment is 0.75 %. — Interpret the result: total employment is expected to rise by 0.75 %.
Step-by-step solution
- Write the elasticity formula: %ΔEmployment = Elasticity × %ΔGDP.
- Substitute the given values: 0.25 (elasticity) × 3 % (GDP growth).
- Multiply 0.25 by 3 to obtain 0.75.
- Interpret the result: total employment is expected to rise by 0.75 %.
Common mistake: Multiplying the growth rate by 100 again, giving a percent of a percent.
Concept tested: Employment elasticity calculation
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