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ECON 1020 (99)
Lecture 48

ECON 1020 Lecture 48: Lecture 48

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ECON 1020
Ryan A.Compton

o982 o GDP gap = actual GDP potential GDP The GDP gap can be either negative (actual GDP < potential GDP) or positive (actual GDP > potential GDP) In the case of unemployment above the natural rate, it is negative because actual GDP falls short of potential GDP Correlation: a systematic and dependable association between two sets of data (two kinds of events); does not necessarily indicate causation o The higher the unemployment rate, the large the GDP gap Arthur Okun was the first to quantify the relationship between the unemployment rate and the GDP gap Okuns Law: every 1 rise in unemployment above natural rate of unemployment will cause GDP to fall 2 of economys potential GDP Example of Unemployment and Okuns Law: Given for 2009: unemployment rate is 8.3 and natural rate is 6.5 When unemployment rate is above the natural rate, actual is higher than potential Unemployment rate is 1.8 above the natural rate Potential GDP is 1360 billion What is the GDP gap? 8.3 6.5 = 1.8 (gap in terms) 1.8 X 2 = 3.6 (apply Okuns Law) 3.6 of 1360 billion = 49 billion Sometimes the economys actual output will exceed its potential GDP, or fullemployment GDP, creating a positive gap Potential GDP can occasionally be exceeded, but the excess of actual over potential GDP eventually causes inflation and cannot be sustained indefinitely The unemployment rate changes based on whether the GDP gap is above or below the natural rate When there is a negative GDP gap, unemployment goes down
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