Additional Mini Project 1
Okun's law

In the early 1960s the American economist Arthur Okun [1] observed that there appears to be a stable empirical relationship between output growth and changes in the unemployment rate. As he said in a book written just before he died '..I found in the data of the fifties an approximate rule of thumb that an increase of 1 percentage point in the unemployment rate was associated with a decrement of about 3 percentage points in real GNP. The rule of thumb held up so well over the next decade that some of my professional colleagues name it "Okun's Law".' [2].

More recent studies have used real Gross Domestic Product (GDP) rather than Gross National Product (GNP) since it represents the total output of a country, irrespective of which country's citizens own the resources used in production. In addition the slope of the estimated equation is closer to -2 than -3. For example Altig, Fitzgerald and Rupert [3], using annual US data from 1960-1996, obtained an estimated equation of g = 3.2 - 2 Du, where g is the growth rate of GDP, u is the unemployment rate and Du denotes the change in the unemployment rate.

Your task in this project is to undertake some research on Okun's Law, familiarising yourself with some of the issues associated with it, and investigating the relationship empirically using both the data set provided for the United States and similar data for one other country that you have tracked down for yourself. Compare results between countries and over different time periods.

You will prepare a word-processed report outlining your findings. The report should be properly referenced, with regression results and graphs attached in the form of appendices. Don't forget to give clear definitions and sources for all the data you use.

You can use TSP, PcGive, or any other suitable package for the statistics and econometric work (even perhaps the regression routines in your spreadsheet program). You should remember that however good your econometrics might be the empirical work will be of no value unless you are able to produce a readable report.

WARNING! Don't forget that you must avoid plagiarism, either in the form of using undigested chunks of material from other sources, or excessive collaboration with fellow students in doing the regressions.