Okun's Law

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Del curso dictado por University of California, Irvine

The Power of Macroeconomics: Economic Principles in the Real World

1281 calificaciones

University of California, Irvine

The Power of Macroeconomics: Economic Principles in the Real World

1281 calificaciones

In this course, you will learn all of the major principles of macroeconomics normally taught in a quarter or semester course to college undergraduates or MBA students. Perhaps more importantly, you will also learn how to apply these principles to a wide variety of situations in both your personal and professional lives. In this way, the Power of Macroeconomics will help you prosper in an increasingly competitive and globalized environment. This course is also available in Portuguese. To join the fully translated Portuguese version, visit this page: https://www.coursera.org/learn/macroeconomia-pt/

De la lección

Unemployment, Inflation, and Stagflation

Some Basic Unemployment Concepts 4:26

Unemployment Defined and Measured 4:03

Okun's Law 3:48

Demand-Pull Versus Cost-Push Inflation and the Keynesian Dilemma6:22

Conoce a los instructores

Dr. Peter Navarro
Professor
Paul Merage School of Business

[MUSIC]

Let's turn now to how economists measure the costs of unemployment.

This is a problem that results not only in a waste

of valuable labor resources, but also the loss of potential output.

This table provides a calculation of the opportunity cost of

the major periods of high unemployment over the last century.

This cost is measured as the cumulative difference in potential

versus actual output. Not surprisingly, the largest economic

loss occurred during the Great Depression, 4.4 trillion between 1930 and 1939.

However, the oil and inflation crises of the 1970s and 1980s

also generated several trillion additional dollars of lost output.

In calculating the numbers, this table indirectly makes use of

a very important concept in macroeconomics known as Okun's Law.

Okun's Law was first identified by economist Arthur Okun.

By studying macroeconomic data, he found an important relationship

between output and unemployment, a co-movement, as it were.

We can see this

relationship in this figure which plots changes in unemployment on the

vertical axis and changes in output or GDP on the horizontal axis.

The graph shows that unemployment changes are

well predicted by the rate of GDP growth.

And, according to Okun's Law, for every 2%

actual GDP falls relative to potential GDP the unemployment

rate rises by about one percentage point. So here's a question.

If GDP begins at 100% of its potential and falls to 98% of potential,

and if the unemployment rate is initially at 6%, how will that rate change?

That's right, according to Okun's Law, the unemployment rate will rise from 6% to 7%.

Now, let's try a more interesting example based on actual history.

1979 the employment rate was 5.8%. But over the next three

years actual, real GDP didn't grow at all as the economy stagnated.

By contrast, potential GDP grew at 3% per year increasing

a total of 9% over the three year period. Can you

use Okun's Law now to predict the unemployment rate in 1982?

Using Okun's Law, we can predict that a 9% shortfall

in GDP should have led to a rise of 4.5 percentage points

in the unemployment rate. Therefore, starting with an unemployment

rate of 5.8% in 1979, Okun's Law would predict a 10.3% unemployment rate by 1982.

In fact, the actual rate was very close, 9.7%.

One important consequence of Okun's Law is that actual

GDP must grow as rapidly as potential GDP

just to keep the unemployment rate from rising.

In a sense, as our population grows and technology changes, GDP

has to keep growing just to keep unemployment in the same place.

Moreover, if you want to bring the unemployment rate

down, actual GDP must be growing faster than potential GDP.

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