Assignment No.

3: Verification of Okun’s Law for Canada

Submitted to: Prof. S. K. Singh
Submitted On: - Oct 26, 2010

Submitted By:-Section C, Group 6

Arun Kamboj PGP26136
Rahul Kumar PGP26162
Rohit Kumar PGP26163
Sandipta Mandal PGP26164
Tanpreet Singh PGP26176
Vinod PGP26189

 Okun’s Law
According to Okun’s Law, the economy loses about 2% of output (GDP) for each 1% increase in the
unemployment rate over the natural rate.

(Y-Y*)/Y* x 100 = - ω (u-u*) where ω ≈ 2

Y* = GDP at full employment, Y is the actual output, u = actual employment rate,
u*= natural rate of employment

 Data Collection
Sources: - www.economagic.com
http://data.worldbank.org

A = Annual % Change in GDP = [(Difference of GDP for 2 years)/ (GDP of previous year)] * 100
B = Annual % Change in Unemployment Rate = [Difference between unemployment rate for the 2
years]

Year Annual % Change in GDP (A) Annual % Unemployment Rate % Change in Unemployment Rate (B)
2000 1.78 6.8 -0.8
2001 2.92 7.2 0.4
2002 1.88 7.7 0.5
2003 5.41 7.6 -0.1
2004 3.02 7.2 -0.4
2005 2.82 6.8 -0.4
2006 2.20 6.3 -0.5
2007 0.52 6.0 -0.3
2008 -2.46 6.1 0.1
 Analysis of the Regression Results in Excel:
A = α – β X + ε , where α = 2.085 and β = 1.84

 Standard Error (ε) = 1.69

 R2 (Coefficient of Determination) = 0.43

Coefficients t-stat value p-value

α 5.36 0
β -3.6 0.002

6
5
4
Annual % change in GDP

3
2
1 Y
Linear
0 (Y)

-1
-2
-3
-1.5 -1 -0.5 0 0.5 1 1.5 2 2.5
Annual % change in unemployment rate

 Analysis:

 Estimated value of β is 1.86.

 A value of 1.86 signifies that for every increase of 1% in unemployment rate, Canada’s GDP
increases by 1.86%.
 This value is significant as t-stat value of -3.6 for β, is less than -2 and therefore is
acceptable.
 Also, higher the t-value, the greater the confidence we have in the coefficient as a
predictor.
 Also, a p -value of 0.002 indicates that in only 0.2% of cases the result would vary from the
estimated β value.
 Hence, indicating a statistically significant value of the estimated β.