Monday, October 28, 2013

According to Okun’s Law, how much output (real GDP) was lost in 2008 when the nation’s unemployment rate increased from 4.6 percent to 5.8...

Okun's Law is a relationship between the rate of
unemployment and real output. It can take several forms one of which is: change in the
employment rate = a + b*(real output growth).


The variables
a and b in the equation have to be determined from historical data. Okun's Law is a
statistical relationship rather than a structural feature of the economy. It has to be
revised regularly with the coefficients altered to reflect the macro economic scenario.
The Law can be used as a tool for forecasting change in real output based on the change
in unemployment.


Even if we have the increase in
unemployment rates from 4.6 to 5.8, it is not possible to plug in the values into the
law and arrive at the decrease in the real output growth as we need the values of a and
b from empirical data.

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