Cyclical unemployment

Question

Suppose that in a specific year the natural rate of unemployment is 5 percent and the actual rate of unemployment is 9 percent. Employ Okun's law to fin out the size of the GDP gap in percentage-point terms. If the nominal GDP is $500 billion in that year, how much output is being foregone due to cyclical unemployment?

Answer 1

GDP gap = 8 % [= (9 – 5) ´ 2]; forgone output = $40 billion (= 8% of $500 billion).