From the unemployment-rate gap and Okun coefficient, estimate the output gap: output gap = −Okun coefficient × (actual unemployment − natural unemployment), quantifying the link between joblessness and economic output.
Input Data
Results
At a glance:Okun's law states that the output gap is proportional (and opposite in sign) to the deviation of the actual unemployment rate from the natural rate.
Formula
gdpGapPct = −okunCoefficient × (actualUnemploymentPct − naturalUnemploymentPct)
$$\text{Output Gap} = -c \times (u - u_{n})$$How to Use
- Enter the actual unemployment rate.
- Enter the natural unemployment rate and Okun coefficient.
- Read the estimated output gap.
FAQ
What does the Okun coefficient (3) mean?
It is the empirical constant in the law — for every 1 percentage point the actual unemployment rate exceeds the natural rate, GDP output is about 3% below potential. It is a rough US historical average; the coefficient differs across countries and periods and can be adjusted.
Is Okun's Law always accurate?
It is an empirical rule, not a precise law, and holds best over the business cycle. In structural shifts (e.g. pandemic, technological change) the relationship can break down, so use it for rough estimation rather than exact forecasting.
How do I interpret the output gap result?
A positive gap usually means the economy is running above potential (overheating risk); a negative gap means output is below capacity (slack, weaker employment). Compare it with the unemployment gap to judge the economic cycle.
How do I set the natural rate of unemployment?
The natural rate is the rate compatible with stable inflation in the long run; for Hong Kong it is often taken around 3%-4% for reference. Use an estimate suited to your economy; it is not fixed.
Can Okun's Law be applied to Hong Kong's economy?
Yes, as a directional reference, but with care. Okun's Law originated from US data with a coefficient of about 3, whereas Hong Kong's small, open economy is dominated by financial and services sectors and is highly exposed to external trade, so its Okun coefficient (and even the natural rate) can differ from the US. The 'direction' holds — higher unemployment means lower output — but the magnitude is best calibrated with local data rather than taken as exactly 3. In practice, treat it as a rough relationship for judging the cycle, and combine it with Hong Kong's own indicators (GDP, labour participation, total employment) and external factors. Do not use it as a precise forecast for policy.
References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.