Explain what is meant by the full employment level of National Income :: Economics

Explain what is meant by the full employment level of National Income and Equilibrium level of National Income. Why might these levels of income be different? National Income is the level of total output, expenditure or income of an economy over a period of time. The main measure of NY used around the world today is Gross Domestic Product, or GDP. This is a measure of all domestic production, that is, production not including trade, which takes into account the value of indirect taxes such as GST. Full employment level of National Income means the level of total output attained when unemployment is at a socially acceptable level. In most cases this is around 5%, however it does tend to vary. If a government sets a target unemployment level and this is reached, the economy is said to be operating at full employment (Nf). Full employment also includes something called the natural rate of unemployment, which includes seasonal and frictional unemployment, as well as those individuals who do not wish to be employed. In other words, the natural rate of unemployment is the proportion of the workforce which voluntarily remain unemployed whilst the labour market is in equilibrium. We can see, therefore, that full employment may include some unemployment, although it is usually a small percentage of the working population. Equilibrium level of employment, however, may have a larger level of unemployment. The diagram below represents a situation in which the full employment level is illustrated. National Income $100b This diagram presents a situation where the SRAS and the AD curve intersect on the LRAS and $100b is the NY. The terms used in the diagram must be explained. SRAS stands for short run aggregate supply, which is the relationship between the aggregate supply of all final goods and services and the price level, holding all else constant. In the short run, the prices of final goods and services can change, but the factor prices do not. Because of this, it is not possible to generalise the time period referred to by the word short, as factor prices can change at any time for numerous reasons. The SRAS is upward sloping because of the law of diminishing returns, that is some inputs can increase whilst others may not, and the fact that resource bottlenecks may occur when the economy moves towards Nf. AD stands for aggregate demand,, which is the sum of all planned spending in an economy. The slope of the AD curve is due to the income effect and the substitute effect. AD is calculated by Consumption + Investment + Government spending + (Exports – Imports), or