economic growth, unemployment and the business cycle Flashcards
What is the business cycle?
The natural, alternating pattern of economic expansion (growth) and contraction (recession).
What does Okun’s Law describe?
The relationship between changes in unemployment and changes in real GDP growth.
What is the general form of Okun’s Law equation?
Δ𝑢ₜ = 𝛼 + 𝛽(GDP growthₜ), where Δ𝑢ₜ is the change in unemployment at time t.
What does a negative value for β (Okun’s coefficient) imply?
That higher GDP growth is associated with a decrease in the unemployment rate.
What does a 1% fall in output imply for US unemployment according to Okun’s Law if the US Okun’s coefficient is -0.37?
Unemployment increases by approximately 0.37 percentage points.
What’s the chain relationship between output, unemployment, and wellbeing?
Fall in output → Rise in unemployment → Fall in wellbeing
What is a key disadvantage of using Okun’s Law?
Okun’s Law is a rule, not a theoretical law, so its accuracy can vary across countries, time periods, and economic conditions. It may not hold during unusual events like financial crises or structural changes in the labor market.
What defines a recession?
Two consecutive quarters of economic decline.
What are some consequences of increased national output? (5)
Higher GDP
lower unemployment
rising incomes
improved efficiency
potential depletion of natural resources.
Can economies recover from downturns on their own?
Yes, economies can naturally correct themselves over time, though policy intervention may speed up recovery.
How does unemployment typically move with the economy?
Unemployment declines when the economy grows and rises during economic downturns.
