Question

According to Okun's law, if the unemployment rate goes from 2% to 5%, what will be the effect on the GDP?

Answer 1

Okun was a professor at Yale who studied relationship between unemployment and productivity. He observed that for the US,when unemployment rises by 1%, then GDP is expected to fall by 2%.

So when unemployment goes from 2% to 5%, the GDP will fall by (5-2)*2 = 6%

Answer 2

According to this law, when unemployment goes up by 1%, GDP drops by 2%. In the question, unemployment rate goes from 2% to 5%, meaning unemployment goes up by 3%, so the GDP drops by 6%. Thus the effect is a drop in GDP by 6%.