IndexInverse RelationshipsIntroductionLiterature ReviewEconomic WellbeingOkun's LawRelationship to Okun's LawModern ApplicationsGDP, Unemployment Rate, and Economic GrowthSecondary Sources on Western Economies and ChinaRepresentation of Okun's Law Using US DataChinaEvaluation of primary dataConclusionThis research The paper will examine the relationship between gross domestic product (GDP) and unemployment rates in world, arguing that the two economic factors are in fact correlated but not necessarily in a causal relationship. The paper first discusses the existing literature on the topic, as well as available quantitative evidence from the last century. In addition to this analysis, the paper compares Germany, the United States and Canada and analyzes recent changes in China. Overall, the paper provides a holistic view through the application of secondary sources and a brief analysis of World Bank data. Through this evaluation, the article concludes that the relationship (and Okun's Law) lies in the modern economy. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essayInverse RelationshipsThe effect of unemployment rates on GDP (and vice versa)"Big ideas, big ambitious projects must be embedded in the culture at a level deeper than the political winds. It must be deeper than the economic fluctuations that might push people against an expensive project because they are on the verge of unemployment and cannot feed their families" ~ Neil deGrasse TysonIntroductionEconomics is a complicated field, which creates an accurate picture of a country's situation. Economic well-being involves many factors. statistics. However, there are two factors in particular that all economists agree are significant in economic analysis: production and unemployment. First, economists have long worried about both the potential influences and impacts of economic output, or how much a country produces and subsequently grows in a given year. Since the creation of the modern international economy, this has been known as a country's gross domestic product (GDP). A country's GDP is not only an indicator of how much a country produces in a given year, but can also indicate the country's overall economic growth compared to previous years' GDP in the same country. This is one of the most crucial indicators of almost every economic aspect, from potential growth to sustainable economic practices. Secondly, unemployment rates play an important role in determining the economic well-being of any country, as they are directly related to an economy's ability to produce and ultimately prove productive in the long run. Unemployment rates have become particularly important indicators of recovery in the years following the economic recession of 2008 and 2009. In recent years, economists and politicians have regarded the unemployment rate as a kind of barometer of economic recovery. In this way, both GDP and unemployment rates are crucial to understanding economic stability and growth, and are therefore intrinsically linked together. This research paper will examine the relationship between gross domestic product (GDP) and unemployment rates around the world, primarily using recent data from the 2008 recession as a backdrop. Although the evidence for this relationship has been well established, for example through the creation of Okun's Law, this article takes an updated view on the topic, arguing that the two economic factors are in fact related but not necessarily in onecausal relationship. In short, the research paperThe paper first discusses the existing literature on the topic, including an overview of Okun's Law and secondary applications of the concept, as well as available quantitative evidence from the last century. In addition to this review, the document discusses several specific cases highlighting the relationship between growth and unemployment; More specifically, the article compares Germany, the United States and Canada to examine Okun's law more closely and considers recent changes in China as a possible exception to the coefficient. Overall, the article provides a holistic view through the application of secondary sources and brief analysis of World Bank data. Through this evaluation, the paper concludes that the relationship between GDP and unemployment rates (and Okun's Law) exists in the modern economy. This is not an exhaustive account of these major economic factors, but rather an adaptation of existing laws and research into a single qualitative and slightly quantitative overview of the modern implications of the relationship between them – particularly as the two economic factors relate to the recovery since the 2008 recession. Literature ReviewEconomic WellbeingOne of the primary functions of economics is to determine the economic well-being and prospects of both individual economies and the global economy as a whole. Drivers of this well-being and potential include economic inputs and outputs, unemployment rates, industrial growth, supply and demand, capital flows, financial crises, and more. In recent years, and more specifically since the 2008 financial crisis, economists and policymakers have turned to two specific factors as leading indicators of economic well-being and recovery from recession: changes in gross domestic product (GDP) and the rate of unemployment. . More specifically, potential GDP growth is described as “the rate of real GDP growth that could be sustained with the economy at full employment and stable inflation” (Higgins, 2011, p. 2). Therefore, projected GDP is one of the most important factors of economic stability and, as this paper establishes, is intrinsically linked to the unemployment rate in developed economies. This has been especially true in Western developed countries which have been hit hardest by the economic crisis. the economic recession (Furceri & Mourougane, 2012). In fact, one study found that financial crises such as the recession that erupted in 2008 can “lower potential output by about 1.5 to 2.4 percent on average, with most of the impact coming from the effect on capital ” (Furceri, Mourougane, 2012, 822). . It is also interesting to note that these authors found that the overall impact of a financial crisis like the one in 2008 varies “depending on the structural characteristics of economies, such as the degree of openness, macroeconomic imbalances, financial deepening and the quality of governance” (Furceri & Mourougane, 2012, p. 822). This is something that will be assessed in the subsequent discussion of this paper, but for now it is sufficient to recognize that the recovery of Western economies depends largely on GDP and unemployment rates – and the empirical (if not causal) relationship between the two. It is also important to note at this point the importance of considering longitudinal data in determining economic well-being. As Baumol (1986) stated nearly thirty years ago, “Anxiety may constrain attention, but it is not necessarily an aid to clear thinking” (p. 1072). The economist goes on to say that concerns about long-term economic growth do not necessarily “recognize that adequate economic analysis of such issuesrequires the careful study of economic history” (Baumol, 1986, p. 1072). In other words, determining economic recovery and well-being is largely a process of historical economic analysis. The author concludes that considering the “long run” is important “because it makes no sense for economists and policymakers to attempt to discern long-run trends and their outcomes from the stream of short-run developments, which may be dominated by transitory conditions” ( Baumol, 1986, p. In this way, this research paper attempts to draw from historical data and economic changes since 2008. Both policymakers and academics would do well to consider general historical trends when evaluating the relationship between GDP and unemployment rates. Okun's Law Nearly fifty years on, Okun's law (or coefficient) has proven to be one of the most accurate and enduring empirical relationships in macroeconomics. Most of the economic literature today evaluating the relationship between GDP and unemployment rates, particularly as signals of recession or economic recovery, is based on this well-established empirical relationship. As Higgins (2011) states, Okun's law essentially describes the relationship as follows: “If GDP grows rapidly the unemployment rate decreases, if growth is very low or negative the unemployment rate increases, and if growth is equal the unemployment rate remains unchanged at potential” (page 2). In other words, there is an inverse empirical relationship between the unemployment rate and GDP in a given country; as GDP increases, unemployment rates decrease and vice versa. This theory was developed by Okun in 1962, based on data from 1947 to 1960 (Okun 1962). More specifically, the coefficient created by Okun predicted that “every percentage point of the unemployment rate above 4% was associated with a real GNP that was about 3% lower” (Fidrmuc & Huang, 2015, p. 2). Over fifty years after this empirical contribution, Okun's coefficient (now known as "Okun's law") is still accepted as a fundamental empirical relationship in macroeconomics. Owyang, Vermann, and Sekhposyan (2013) provide a detailed overview of Okun's law and present a graph to highlight the empirical relationship. The graph is reproduced here. The law report by Okun Owyang, Vermann and Sekhposyan, 2013, p. 2. The authors explain that Okun attempted to identify the relationship between two variables: “the difference between the actual level of production and its potential” and “the difference between unemployment and its natural rate” (Owyang, Vermann and Sekposyan , 2013, page 2). By way of explanation, the authors state, “potential output is not the maximum an economy could theoretically produce, but a lower, sustainable number” (Owyang, Vermann, & Sekposyan, 2013, p. 2). In this way, Okun's law is more of a description of the relationship between factors that influence economic growth, rather than a static and immutable relationship. Modern ApplicationsWhile more specific applications of Okun's law to recent economic recession and recovery will be provided in subsequent chapters. discussion, it is worth mentioning how Okun's coefficient has withstood economic tests over the last half century. For the most part, the empirical relationship has stood the test of time, and most economists agree that the relationship has proven true over the past fifty years of economic change (Fidrmuc & Huang, 2015; Hoffman & Lemieux, 2014; Burgen, Meyer and Tasci, 2012). However, this is an important caveat in the continued acceptance of Okun's law: a relationship exists, but not necessarily a causal one. As Burgen, Meyer and Tasci (2012) conclude, it is essential to recognize “that Okun's law is only a relationempirical. It may not necessarily reflect a structural link between output growth and the unemployment rate. Furthermore, the relationship may change over time as labor market dynamics change” (np). Similarly, Fidrmuc and Huang (2015) clarify that the law is “an empirically observed rather than theoretically derived relationship” and that it “establishes a correlation and says little about whether the direction of causality is from growth to unemployment or vice versa” ( page 5). Therefore, the subsequent discussion of case studies and empirical evidence does not attempt to establish a causal relationship, but simply an overview of modern adaptation to Okun's law. GDP, Unemployment Rate, and Economic Growth According to the average political expert or economic commentator, the The economic implication of Okun's law following the 2008 financial crisis is quite simple: “we need to get the American worker back into the workforce.” (Patton, 2012, n.p.). It seems that the simplest way to stimulate economic growth is to reduce the unemployment rate, which in turn should increase output and GDP. However, as in most economic relationships, it is not simply a matter of adapting one economic factor to improve the other. As already noted above, the relationship between GDP and unemployment is established, but not necessarily causal. Therefore, instead of focusing on causality, the subsequent discussion addresses the relationship between GDP and unemployment in terms of modern examples of economic recovery following the financial crisis in 2008. More specifically, the discussion moves to three major Western economies – the United States, Germany and Canada – to compare economic trends and recovery both before and after the recent recession. The discussion also turns to the Chinese economy as an example of a potential exception to Okun's law and the inferred relationship; More specifically, China's economic changes highlight the fact that Okun's law regarding the relationship between GDP and unemployment may only be applicable to already developed and stabilized Western economies. This discussion uses two aspects of the assessment: findings from secondary sources specifically covering these countries, as well as an original quantitative description of economic changes in these four countries since 2007, using World Bank data. Secondary Sources on Western Economies and China As mentioned above, numerous studies have been conducted over the past half century to confirm Okun's law during economic fluctuations, financial crises, and historical changes. For example, one study found that the relationship varied only slightly in its “responsiveness” to unemployment – ​​using data from 1948 to 2007, one researcher found that the Okun coefficient “declined dramatically in the 1990s and has remained ever since to a lower level” (Owyang and Sekhposyan, 2012, p. The main point, however, is that the relationship remains true, and it should prove useful to examine data from specific countries. This article has already discussed the fact that the relationship between GDP and unemployment remained essentially the same in OECD countries between 1960-2008 (Furceri & Mourougane, 2012). Hoffman and Lemieux (2014) examine unemployment levels during the so-called “Great Recession” in three major Western economies: Germany, Canada and the United States. More specifically, the paper investigated “potential reasons for the strikingly different performance of the labor market of the [three countries]… during and after the Great Recession of 2008-2009” (Hoffman &Lemieux, 2014, p. 1). Across key findings, the study found that percentage changes in unemployment across the three countries varied greatly: unemployment remained relatively stable in Germany, increased slightly in Canada, and increased to significantly higher levels in the United States (Hoffman & Lemieux , 2014). ). Since the Great Recession affected nearly all Western economies, one would expect all three countries to see a dramatic change in the unemployment rate, along with a decrease in the GDP growth rate. So why then has the United States experienced a much greater change in unemployment in recent years? The answer, according to this study, is twofold: First, “job fluctuations in the construction industry are linked to booms and busts in the United States.” > real estate markets can explain much of the differences between countries,” and second, “compared to pre-recession trends, there was a much larger decline in GDP in the United States than in Germany between 2008 and 2012” (Hoffman & Lemieux, 2014, p. While the first result is not necessarily or intrinsically crucial to this article's discussion of GDP growth and unemployment rates, it is to provide insight into the reiteration of the fact that Okun's law is a empirical observation rather than a causal relationship. In other words, the fact that the composition of the U.S. labor market, largely centered on the construction industry during the housing boom, influences the Okun coefficient results serves as a reminder that the economy does not respond well to a “quick fix” fix. It is multifaceted, and the relationship between GDP and unemployment rates is only one part of growth (or lack thereof). The second finding of this article, however, highlights the continued validity of Okun's law. The relationship between GDP and unemployment is only reconfirmed by a bit of economic research; Simply put, the United States was hit hardest by the 2008 financial crisis, and therefore experienced the largest fluctuations in both GDP and unemployment rates. As the authors state, “the differences in unemployment trends between the United States and Germany are very much in line with the observed difference in GDP trends” (Hoffman & Lemieux, 2014, p. 4). More specifically, the authors note that the Okun report predicts that the 10 percentage point gap in GDP between the two countries would result in a 5 percentage point difference in the two countries' unemployment rates; this is less than two percentage points less than the actual difference, which is 6.5 percentage points (Hoffman & Lemieux, 2014, p. 7). Therefore, the relationship appears to hold in evaluating the performance of the Canadian, American, and German economies. The relationship is further highlighted by the graph of Burgen, Meyer and Tasci (2012) from their discussion of the modern application of the coefficient: Representation of Okun's law, using US data. These authors' analysis was based on data from the last twenty years. years and found no change in the applicability of Okun's law during the financial crisis and recovery. As with the above assessment, these scholars found that the percentage change in real GDP had a relatively stable relationship with the percentage change in unemployment rates from 2009 to 2011, the first years of recovery. China The discussion of China in relation to this relationship between GDP and unemployment also provides insight into the applicability of the relationship in the modern economy. First, scholars recognize the relationship between workforce size and productivity, even in China's fast-paced economic environment. One study found that “a.