Question

Define and graphically explain Okun’s Law

Answer 1

Okun's law pertains to the relationship between the U.S. economy's unemployment rate and its gross national product (GNP). It states that when unemployment falls by 1 %, GNP rises by 3 %. However, the law only holds true for the U.S. economy and only applies when the unemployment rate is between 3 % and 7.5 %.

Graph of US quarterly data (not annualized) from 1948 through 2016 estimates a form of the difference version of Okun's law: %Change GDP = 3.2 - 1.8*(Change Unemployment Rate). R^2 of 0.463. Differences from other results are partly due to the use of quarterly data.