Enter the actual GDP and potential GDP into the calculator to determine the unemployment rate using Okun’s Law.
Okun’S Law Formula
The following formula is used to calculate the Okun’s Law:
U = a * (Y - Y*) / Y*
Variables:
- U is the unemployment rate
- a is the Okun’s coefficient
- Y is the actual GDP
- Y* is the potential GDP
To calculate the Okun’s Law, subtract the potential GDP from the actual GDP. Multiply the result by the Okun’s coefficient. Divide the product by the potential GDP. The final result is the unemployment rate.
What is a Okun’S Law?
Okun’s Law is an empirically observed relationship between unemployment and losses in a country’s production, named after Arthur Melvin Okun, who first proposed the relationship in 1962. The “law” states that for every 1% increase in the unemployment rate, a country’s GDP will be roughly an additional 2% lower than its potential GDP. The relationship varies depending on the country and the time period. However, the “law” is seen as a rule of thumb to estimate the decrease in output due to the increase in unemployment. It is important to note that Okun’s Law is a statistical relationship rather than a theory, and it describes the observed relationship between unemployment and GDP, rather than explaining the reasons behind this relationship.
How to Calculate Okun’S Law?
The following steps outline how to calculate Okun’s Law:
- First, determine the change in the unemployment rate (%).
- Next, determine the change in the real GDP (%).
- Next, gather the formula from above = UR = a – b * GDP.
- Finally, calculate the unemployment rate using Okun’s Law.
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem :
Use the following variables as an example problem to test your knowledge.
change in the unemployment rate (%) = 2
change in the real GDP (%) = -1.5
