Question

Suppose the population of a country is 1.1 million and the labor force is 800,000. 760,000 are employed. Assume that full-employment occurs at a 4 percent unemployment rate at a real GDP level of $100 billion. Based on the information above use Okun's Law to find how much potential GDP has been lost because the economy is not at full employment

Answer 1

Answer: $2 billion

Explanation:

Okun's law posits that for every percentage point that actual unemployment rate is above the natural unemployment rate, actual GDP will be lower than potential GDP by 2%.

Actual rate of unemployment here is:

= (Labor force - Employed) / Labor force

= (800,000 - 760,000) / 800,000

= 5%

Actual unemployment - Natural unemployment:

= 5 - 4

= 1%

Potential GDP lost is:

= (1% * 2) * 100 billion

= 2% * 100 billion

= $2 billion