Question

Suppose that the natural rate of unemployment in a particular year is 6 percent and the actual rate of unemployment is 9 percent. Use Okun’s law to determine the size of the GDP gap in percentage-point terms. If the potential GDP is $500 billion in that year, how much output is being forgone because of cyclical unemployment?

Suppose that the natural rate of unemployment in a particular year is 6 percent and the actual rate of unemployment is 9 percent. Use Okun's law to determine the size of the GDP gap in percentage-point terms. If the potential GDP is $500 billion in that year, how much output is being forgone because of cyclical unemployment? Instructions: Enter whole numbers for your answers below. GDP gap=D % Forgone output = $ billion

Answer 1

Solution :

First of all we take the difference between actual rate of unemployment and natural rate of unemployment

9%-6%= 3%

Since, The actual rate of unemployment exceeds the natural rate of unemployment by 3%, therefore it is cyclical unemployment.

According to Okun's law, this translates into an 6 % GDP gap in percentage-point terms (= 2 × 3%).

Therefore the GDP is 6%

Calculating Forgone Output :

By applying Okun’s law we have already found that the GDP gap is 6%, it means that we are 6% below the GDP amount which is given as $500 billion,

Therefore the output forgone = (6/100) ×$500 billion

=0.06×$500 billion

=$30 billion

Therefore the Forgone Output is $30 billion