Question

Is the Okun’s law really a law? Explain your answer

Answer 1

No, Okun's law is not really a law. It is an economic theory that explains the relationship between unemployment rate and output produced in the country. It says that there is a negative relationship between unemployment rate and output produced or positive relationship between output gap and unemployment gap. According to Okun's law, if unemployment rate from natural rate of unemployment increases, output gap will increase too.

It has been observed that for every 1% increase in unemployment rate, a country's output will have an additional 2% fall in output from its potential output.