Okun’s Law

To get right to the point...

Okun's Law is used to find unemployment when dealing with output instead of specific unemployment metrics.

For example, given the following situation...

Question: If potential output is 5,000 when actual output is 4,000 and Un = 5%, what is the actual unemployment rate (according to Okun’s Law)?

…how might we apply Okun’s Law?

Well, first... we have to understand Okun’s Gap!

What is Okun's Gap?

Okun’s gap is the difference between potential output (Yp) and actual output (Y) in an economy. This can be expressed mathematically as:

Okun’s Gap = Yp - Y

The most important thing to note here is that Okun's Gap is a good way of determining the health of an economy. How so? Remember...


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