Okun's Law is an empirically observed relationship between unemployment and economic growth, specifically gross domestic product (GDP). The law posits that for every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than its potential GDP. This relationship highlights the idea that when unemployment is high, economic output is not fully realized, leading to a loss of productivity and efficiency. Furthermore, Okun's Law can be expressed mathematically as:
where is the change in GDP, is the change in the unemployment rate, is a constant representing the growth rate of potential GDP, and is a coefficient that reflects the sensitivity of GDP to changes in unemployment. Understanding Okun's Law helps policymakers gauge the impact of labor market fluctuations on overall economic performance and informs decisions aimed at stimulating growth.
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