Question

Suppose the real GDP of an economy is $560 billion dollars and its unemployment rate is 6%.

If the natural rate of unemployment is estimated at 4%, what is the value of the country’s potential GDP (LAS) in billions of dollars? Enter your response below rounded to 1 decimal place.

Value of the country’s potential GDP (LAS) is ____$ billion.

Answer 1

Ans: $583.3 billion

Explanation:

According to Okun's law:

2(Unemployment rate - Natural rate of unemployment) = [(Potential GDP - Actual GDP) / Potential GDP] * 100%

2(6% - 4%) = [(Potential GDP - 560) / Potential GDP] * 100%

4% = [(Potential GDP - 560) / Potential GDP] * 100%

(Potential GDP - 560) / Potential GDP = 4% / 100% = 0.04

Potential GDP - 560 = 0.04Potential GDP

Potential GDP - 0.04Potential GDP = 560

0.96Potential GDP = 560

Potential GDP = 560 / 0.96 = $583.3 billion