Question

Suppose the trend growth is 2 percent and the economy is producing output at an annual rate of $5 trillion. Suppose also that the rate of unemployment changes from 8 percent to 4 percent.

a. Using Okun's rule of thumb calculate the output after the unemployment change

Answer 1

Answer:
According to Okun's law or Okun's rule of thumb, 1% increase in unemployment causes 2% fall in GDP.
Using same hypothesis,
Given, decrease in unemployment = 8% - 4%
= 4%
So, increase in GDP rate
= 4% * 2
= 8%

Hence, new rate of GDP growth would be = old GDP + gain due to unemployment decrease
= 2% + 8%
= 10%

Hence, increase in GDP value annually = 10% of 5 trillion $
= $0.5 Trillion

Net GDP value = old GDP value + increase in GDP value
= 0.5 +5
= $5.5 Trillion

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