Unit 2

GDP Gap: The amount by which actual GDP falls short of potential GDP.

Okun's Law: For every 1% in which the actual unemployment rate exceeds the NRU, a GDP gap of about 2% occurs.

• (Actual unemployment rate - NRU) x 2
• Ex: In 2012, the unemployment rate for Mexico was 7.4%. The NRU for Mexico is 6%.
• (7.4 - 6) x 2 = 2.8 (GDP gap)

Rule of 70: Used to determine how many years it takes for a value to double given a particular annual growth rate.

• 70 / yearly interest rate
• Ex: If you put $20,000 in the bank and it earns a yearly interest rate of 7%, how many years will it take for your income to double?
• 70 / 7% = 10 years