Tuesday, 4 August 2009

Okun's Law - learn some economics

One good thing about the crisis is that one can learn some basic economics from what is going on. Here is a chance to learn what Okun's Law is. In the US there has been some debate about whether unemployment has risen by more than expected in thecurrent recession. Paul Krugman in this article (and see the link to his earlier posting) presents some data and explains that in the last 18 months US growth has fallen roughly 7.7% below trend -- that means that the % change in output (GDP) relative to par is -7.7. Okun's Law tells you how to translate this change in output into a change (opposite sign) in the unemployment rate: traditionally this is roughly a 1 : 0.5 ratio so that -7.7 translates to an increase in the unemployment rate of 3.85%. In fact unemployment rose from 4.8% to 9.3%, a change of 4.5%, slightly higher than Okun's Law predicts, but not massively out of line.
See the earlier posting on the Paradox of Thrift for an opportunity to learn some more...

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