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Theoretical and Applied Economics
No. 10 / 2013 (587)

Modeling the relationship between GDP and unemployment for Okun’s law specific to Pakistan during 1976-2010

Muhammad Aamir KHAN
McGill University, Montreal, Canada
Abdul SABOOR
PMAS Arid Agriculture University Rawalpindi, Pakistan
Sarfraz Ahmad MIAN
PMAS Arid Agriculture University Rawalpindi, Pakistan
Aftab ANWAR
PMAS Arid Agriculture University Rawalpindi, Pakistan

Abstract. Okun’s law postulates a negative relationship between movements of the unemployment rate and the real gross domestic product (GDP). This article investigates the link between the real GDP growth and unemployment, as described by Okun’s law. For this purpose we have used time series annual data during the period 1976 to 2010 and used unit root test, Hodrick–Prescott filter and least square method to find the relationship between GDP growth and unemployment in Pakistan. The empirical analysis shows that a rise of one percentage point of unemployment is associated with a decline of 0.36 percentage point of real GDP growth.

Keywords: Okun Law; Gross Domestic Product; Hodrick–Prescott filter; Unit Root Test.

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