ECON 1020 Lecture Notes - Lecture 48: Arthur Melvin Okun, Potential Output

• School: University of Manitoba
• Department: Economics
• Course: ECON 1020
• Professor: Ryan A.Compton

Document Summary

Lomoar cpsd| 987298: 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: 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. Okun"s law: every 1% rise in unemployment above natural rate of unemployment will cause gdp to fall 2% of economy"s potential gdp. Given for 2009: unemployment rate is 8. 3% and natural rate is 6. 5% When unemployment rate is above the natural rate, actual is. Unemployment rate is 1. 8% above the natural rate higher than potential. 8. 3% - 6. 5% = 1. 8% (gap in % terms)