FULL EMPLOYMENT/NRU

Full employment occurs an economy is producing at a level of

output at which almost all the nation’s resources are employed.
The unemployment rate when an economy is at full employment
equals the natural rate, and includes only frictional and structural
unemployment. Full-employment output is also referred to as
“potential output.”

Natural Rate of Unemployment (NRU): The level of

unemployment that prevails when an economy is producing at
its full employment level. Includes structural and frictional
unemployment. While countries’ NRUs can vary, the NRU in
the United States tends to be close to 5 percent.

GDP GAP/ OKUN’S LAW

GDP GAP- The difference between actual and potential GDP.
Occurs when the economy fails to create enough jobs or all who
are able and willing to work, potential production of goods and
services is irretrievably lost.

Okun’s Law- It’s the relationship between the unemployment

rate and GDP gap. It indicates that for every 1% point by which
the actual unemployment rate exceeds the natural rate, a negative
GDP gap of about 2% occurs.
UNEMPLOYMENT
Unemployment means to be actively seeking,
but unable to find, work. Unemployment rises
during recessions and falls during expansionary
phases of the business cycle.

Types of Unemployment
 Frictional: Someone is frictionally unemployed if
they are “in between jobs” or are seeking their
1st job, but has employable skills.
Ex) A college graduate who is entering the job
market for the first time.

 Structural: Workers are structurally unemployed

when they lose their jobs to a changing structure
of the economy. because they do not match
what is in demand by producers or have skills
have been left behind by economic advancement
Ex) The automobile factory is likely to produce
more cars at a lower cost by employing more
technology and less labor.

 Cyclical: Results from a fall in total demand for a

nation’s output. It’s associated with the recession
or contraction phase of the nation’s business
cycle. It’s mainly caused by decline in total
spending.
Ex) A bank’s loan manager who is let go because
there is a fall in demand for bank loans from
households and firms.
FULL EMPLOYMENT/NRU
Full employment occurs an economy is producing at a level of
output at which almost all the nation’s resources are employed.
The unemployment rate when an economy is at full employment
equals the natural rate, and includes only frictional and structural
unemployment. Full-employment output is also referred to as
“potential output.”

Natural Rate of Unemployment (NRU): The level of

unemployment that prevails when an economy is producing at
its full employment level. Includes structural and frictional
unemployment. While countries’ NRUs can vary, the NRU in
the United States tends to be close to 5 percent.

GDP GAP/ OKUN’S LAW

GDP GAP- The difference between actual and potential GDP.
Occurs when the economy fails to create enough jobs or all who
are able and willing to work, potential production of goods and
services is irretrievably lost.

Okun’s Law- It’s the relationship between the unemployment

rate and GDP gap. It indicates that for every 1% point by which
the actual unemployment rate exceeds the natural rate, a negative
GDP gap of about 2% occurs.