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 percent?

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justaguide | College Teacher | (Level 2) Distinguished Educator

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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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