Concept Introduction:
Okun’s Law: This law states that the rate of unemployment and the output gap is inversely related to each other. When the output gap increases by one percent, the unemployment rate decreases by half percent.
The relation established by Okun’s law is,
Here,
- Unis unemployment rate.
- b is the intercept.
- m is the slope.
Natural rate of unemployment: It is the rate of unemployment when the real rate of output is equal to the potential output in the economy. At such a point the economy does not have a recessionary or inflationary gap.
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