Question

Okun's Law for Brazil between the years 1990 and 2013: the vertical axis gives the change in unemployment rate and the horizontal axis gives the real GDP growth rate: we can state the equation of the line of best fit as An= -0.1183(growthrate) +0.4161 Brazil (1990-2013) Change in unemployment rate (%) y=-0.1183x + 0.4161 R? = 0.2247 No Na 2009 -10 Real Growth rate (%) Reference O n Law for Bran If Brazil's economy is not growing at all, according to the estimated Okun's Law, what is the change in unemployment rate? a) On average, unemployment rate will be increasing. O b) On average, there is no change in the unemployment rate. c) On average, unemployment rate will be decreasing. d) It is hard to tell but it depends on the year.

Answer 1

Okun's Law refers to the relationship between unemployment and GDP growth. It says that with an increase in unemployment by 1%, there is a decrease in GDP by 2%.

• From the graph, we can see that the unemployment rate has been decreasing. So, according to the equation,

$\Delta u= -0.1183x + 0.4161$, on average, the unemployment rate will be decreasing.

• The equation which shows the best-fitted line is given as

$\Delta u = -0.1183(2) + 0.4161 = -0.2366+ 0.4161 = 0.1795$

Hence a 2% increase in the growth rate will account for an increase in the unemployment rate of about 0.1795 percentage points.

• For the unemployment to be constant, the equation has to be set as $\Delta u = 0$ , then we have to find out the value of x as it represents the growth rate of the economy.

$\Rightarrow 0.1183x = 0.4161 \Rightarrow x = 0.4161/0.1183 \Rightarrow x = 3.5$

The rate of growth of Brazil's economy is 3.5%.