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Okun's law
We know that when there is unemployment, the economy is not
producing at full output since there are people who are not
working. But, what exactly is the relationship between
unemployment and national output or GDP? How much would
we expect the GDP to increase if unemployment fell 1%? These
are useful and important questions to ask when trying to
understand the costs of unemployment.
An economist named Arthur Okun looked at the relationship
between unemployment and national output over the past 50
years. He noticed a general pattern and stated an equation to
explain it. His equation, Okun's Law, relates the percentage
change in real GDP to changes in the unemployment rate. In
particular, the equation states:
% change in real GDP = 3% - 2 x (change in unemployment
rate)
This equation basically says that real GDP grows at about 3%
per year when unemployment is normal. For every point above
normal that unemployment moves, GDP growth falls by 2%.
Similarly, for every point below normal that unemployment
moves, GDP growth rises by 2%. This equation, while not
exact, provides a good estimate of the effects of unemployment
upon output.
For example, let's say a country had an unemployment rate of
8% in one year and 6% in the next. Using Okun's law, it would

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Okun's law We know that when there is unemployment, the economy is not producing at full output since there are people who are not working. But, what exactly is the relationship between unemployment and national output or GDP? How much would we expect the GDP to increase if unemployment fell 1%? These are useful and important questions to ask when trying to understand the costs of unemployment. An economist named Arthur Okun looked at the relationship between unemployment and national output over the past 50 years. He noticed a general pattern and stated an equation to explain it. His equat ...
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