Mathematical Statements
The gap version of Okun's law may be written (Abel & Bernanke 2005) as:
- , where
- is potential GDP
- is actual output
- is the natural rate of unemployment
- is actual unemployment rate
- is the factor relating changes in unemployment to changes in output
In the United States since 1955 or so, the value of c has typically been around 2 or 3, as explained above.
The gap version of Okun's law, as shown above, is difficult to use in practice because and can only be estimated, not measured. A more commonly used form of Okun's law, known as the difference or growth rate form of Okun's law, relates changes in output to changes in unemployment:
- , where:
- and are as defined above
- is the change in actual output from one year to the next
- is the change in actual unemployment from one year to the next
- is the average annual growth rate of full-employment output
At the present time in the United States, k is about 3% and c is about 2, so the equation may be written
The graph at the top of this article illustrates the growth rate form of Okun's law, measured quarterly rather than annually.
Read more about this topic: Okun's Law
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