Question

1. A, B, C. Arthur Okun’s law identifies an inverse relationship between GDP and unemployment. Using the common U3 measure of unemployment, Okun found that the inverse relationship does not have a one-to-one ratio. Separately answering as parts A, B, and C, give and explain three different reasons why the ratio is not one-to one. Include the actual expected ratio based on reasons that you provide, as well. (note: You are not being asked to give reasons why the relationship is an inverse. Rather, you are being asked to give reasons why the inverse relationship’s ratio is not one-to-one. )

Answer 1

Okun's law states that there is inverse relationship between GDP and unemployment . Okun's ;law may be described as 'Okun's rule of thumb' as it is based on empirical observation and not based on result derived from theory. Okun's law is approximate because employment is not the only factor that affects output. Other factors like productivity also affects output.Okun law states that one point increase in cyclical unemployment rate is related with 2 points of negative growth in real GDP.

There are many reasons why GDP increases or decreases fastly than decrease or increase in umemployment.

With increase in unemployment-

A)unemployed persons are no longer in the labor force and they (no longer  look for job),so they are not included in the count  of unemployment .

B)Employed workers work for less period of time so less goods and services are produced .

C) Labor productivity falls because employers use more workers than is actually needed by them.

In the US , Okun estimates that when unemployment falls by 1 per cent , GNP will rise by 3% and GDP will rise by 2%