Okun's Law Calculator

Formula

The formula to calculate the Unemployment Rate (U) using Okun's Law is:

\[ U = a \times \left( \frac{Y - Y^*}{Y^*} \right) \]

Where:

$ U $ is the Unemployment Rate
$ a $ is the Okun's Coefficient
$ Y $ is the Actual GDP
$ Y^* $ is the Potential GDP

What is Okun's Law?

Okun's Law is an empirically observed relationship between unemployment and losses in a country's production, named after Arthur Melvin Okun, who first proposed the relationship in 1962. The "law" states that for every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than its potential GDP. The relationship varies depending on the country and the time period.

Example Calculation

Let's consider an example:

Okun's Coefficient (a): 2
Actual GDP (Y): $1,000,000
Potential GDP (Y*): $1,050,000

Using the formula to calculate the Unemployment Rate:

\[ U = 2 \times \left( \frac{1,000,000 - 1,050,000}{1,050,000} \right) = 2 \times \left( \frac{-50,000}{1,050,000} \right) \approx -0.095 \, \text{or} \, -9.5\% \]

This demonstrates that with an Okun's coefficient of 2, an actual GDP of $1,000,000, and a potential GDP of $1,050,000, the unemployment rate would be approximately -9.5%.