ECON211 Lecture Notes - Lecture 8: Real Wages, Root Mean Square, Jobless Recovery
16 Dec 2016
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Document Summary
Systematic relation between the output gap and cyclical unemployment. But neither natural rate nor potential output observable. Empirical study- not a theory but a (claimed) observed statistical regularity. Assume a contractionary gap of -1% and = 1. 6. So the actual unemployment rate is 0. 625 percentage points above the natural rate of unemployment. So now we use okun"s law to calculate the lost income/ output per head of population in a situation of the actual unemployment rate being higher than the natural rate. Assume that the natural rate is 5% but the actual rate is 10%. Actual real gdp is ,000 million and the population is. So calculate the output gap as: ( ) where = 1. 6. So the output gap is 1. 6 (10 5) = 8% So actual output y, which is ,000 million, is 8% less than potential output y* So the income lost in this period is ,700 million in total.
