Answer to Question #222065 in Macroeconomics for Collins

Question

Estimate the Okun’s law and Philips’s curve equations for Ghana over two periods
(1983-2000 and 2001-2018). Explain fully the difference in the estimates of the two
periods for both equations. [Hint: Use the average annual GDP growth rate for each
period as the normal growth rate for the Okun’s law equations and use the period average
unemployment rate as the natural rate of unemployment for the Philips curve equation.

Answer 1

Okun's law

According to Okun, a country's GDP will rise if the country experiences a percentage increase in employment.

Within the two periods given, Ghana's total employment raised from 5.4 million to 10.2 million when the annual growth rate improved from 2.5% to 5.2%. When looking at Ghana, the unemployment spell of an individual is determined by the reservation wage, marital status, education and age.

Phillips curve

Phillips curve model has been employed in the empirical establishment of inflation and unemployment in Ghana. According to this model, the desired price of firms that would maximize profit at a particular point in time is specified as follows:

$P_t*=P_t -(y_t-y_e)$

This explains that the desired price of a firm $P_t*$ is affected by the general price level and the unemployment derivation from its natural rate shown by the cyclical gap $(y_t-y_e)$. This implies that a firm's desired relative price rises during economic boom and falls when an economy experiences recession.