GDP Gap, Okun's Law, and the Rule of 70

GDP Gap, Okun's Law, and the Rule of 70

2-5-16

GDP Gap- the amount by which actual GDP falls short of potential GDP

Okun’s Law- for every 1% in which the actual unemployment exceeds the Natural Rate of Unemployment(NRU) a GDP Gap of about 2% occurs.

(Actual-Natural)*2

Ex. In 2012 the Unemployment rate for Mexico was 7.4%, the NRU of Mexico was 6%. The GDP Gap.

(Actual-Natural)*2=(7.4%-6%)*2= 2.8%

Rule Of 70-it is used to determine how many years it takes for a value to double given a particular annual growth rate. 70/Yearly interest rate will equal to how many years it will take.

Ex. If you put $20,000 in the bank and it earns a yearly interest of 7% how many years will it take for your income to double.

10 years because 70/7=10.