Estimate the GDP gap from the difference between actual and natural unemployment rates.
GDP Gap (%)—
Estimated Actual GDP—
Lost Output—
Unemployment Gap—
Okun's Law (Gap Version):
GDP Gap (%) = −Coefficient × (Actual Unemployment − Natural Unemployment)
Actual GDP = Potential GDP × (1 + GDP Gap / 100)
What is Okun's Law?
Okun's Law is an empirical relationship between unemployment and GDP, named after economist Arthur Okun. It states that for every 1% increase in unemployment above the natural rate, GDP falls by approximately 2% below potential. The exact coefficient varies by economy and time period.
Interpreting Results
Negative GDP Gap — Economy is producing below potential (recessionary gap)
Positive GDP Gap — Economy is overheating (inflationary gap)
Coefficient of 2 — Standard estimate; ranges from 1.5 to 3 depending on the economy