Unit 3: Okun's Law

Question 1

Financial Costs of Unemployment

Answer 1

Unemployment above the natural rate of unemployment has both financial and social costs
Financial cost is the lost output that results from labour resources that are sitting idle

• Think back to the production possibility curves from unit one
  Point L in the graph to the right could refer to an unemployment higher than the natural rate
  The lost output is known as the GDP gap

Question 2

GDP gap:

Answer 2

The difference between the actual GDP produced by the economy and the potential GDP that could be produced if the unemployment rate was not higher than the natural rate.

Question 3

Okun’s Law

Answer 3

Okun’s Law: For every percentage point that the actual unemployment rate exceeds the natural rate, a GDP gap of 2% occurs

An economist, Arthur Okun, created a formula to estimate the size of this gap

Question 4

GDP Gap:

Answer 4

actual GDP x (unemployment rate - natural employment) x (2) // 100

Question 5

This means that the potential GDP of the Canadian economy was

Answer 5

$844.5 billion - if only it had been able to achieve full employment