Macroeconomics, 2nd Edition by Pearson

THE LABOUR MARKET

217

between 1994 and 2000, and was 7.3 per cent in that year. Suppose the nat-

ural rate of unemployment is 6 per cent. Then, cyclical unemployment is

7.3 minus 6 per cent, or 1.3 per cent. According to Okun’s Law that would

be associated with a 3



1.3

=

3.9 per cent negative output gap. Real GDP

in the year 2000 was roughly INR 19,600 billion. Hence, a 3.9 per cent

output gap means that the economy was producing 3.9 per cent of INR

19,600 billion, or INR 764.4 billion less than its potential. The lost out-

put represents the opportunity

14

cost associated with the higher cyclical

unemployment. A negative output ...