Real GDP growth rate of a country measures the rate of economic growth. This measure gives the inflation adjusted value, and expressed in real terms rather than in nominal terms. It is expressed as the percentage value of the rate of change of the GDP of a nation from one time period to another. In other words, it is the rate of growth of the real GDP of a country (Burda & Wyplosz, 2012).
The real GDP growth rate of India is 7.9% in 2015 (World Bank, 2017).
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Figure 1: Real GDP growth rate of India
(Source: World Bank, 2017)
The above figure shows the real GDP growth rate of India from 2005 to 2015. There have been ups and downs in the GDP growth rate in the past 10 years. The percentage reached a peak in 2010 at 10.3% while it was lowest in 2008 at 3.9%. It again declined in 2012 and from then, the trend is going up.
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Figure 2: GDP of India
(Source: World Bank, 2017)
Figure 2 depicts the GDP of India from 2006 to 2015. It is evident from the chart that the GDP is rising; that is, there is economic growth in the economy.
Unemployment rate measures the level of unemployment in a country. It is calculated by diving the total unemployed pool by the total work force. When there is growth in the economy, unemployment level falls, and during recession or contraction of the economy, the level of unemployment rises (Mankiw, 2014).
The unemployment rate in India was 4.90% in 2013 (Ministry of Labor and Employment, India, 2017).
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Figure 3: Unemployment rate in India
(Source: Ministry of Labor and Employment, GoI, 2017)
The above figure is based on the data from Ministry of Labor and Employment, India. During 2009-2010, the unemployment rate went up to 9.4%, while it started to decline since 2011.
The relationship between real GDP growth rate and unemployment rate is described in Okun’s Law. This law describes that one single point rise in the rate of cyclical unemployment is related with 2 percentage points of negative growth in the real GDP of a country. However, this relationship is variable in different countries and also on the time period considered. To put simply, the GDP of a country will be around an extra 2% less than the potential and expected GDP for every 1% rise in the rate of unemployment (Ball, Leigh & Loungani, 2013). For example, if the gap between actual and potential GDP of a country is 1%, then for every 1% rise in unemployment as per Okun’s law, the GDP gap would be (1 x -2) = -2.0%. In that case, $1000 x 0.02 = $20 billion output would be foregone. Thus, there is rise in unemployment with a fall in GDP.
According to the data of India, it is found that, as economic growth i.e. GDP growth rate is increasing, the unemployment rate falls. Hence, it can be said that, there is a relationship between real GDP growth rate and unemployment of India.
In 2013, the GDP forecast for the country was reduced to 5% from 8.5%. It is a reduction of 40%. According to Okun’s rule of thumb, for 40% fall in GDP, there should be a 20% rise in the unemployment and that is a scary situation for any country. There are many factors contributing to the fall in real GDP growth rate, unemployment is one of them. However, if other things remain the same, then for 40% negative growth of real GDP, there would be 20% unemployment. Although, from the data, we see that in 2013, the unemployment rate is quite low, 4.9%. Therefore it can be said that there is Okun’s law prevailing in the relationship between real GDP and unemployment, but the effect is weak. This law mainly highlights the fact, that the negative economic growth of a country is related to rising unemployment to some extent and the degree of relation may be strong or weak (Cazes, Verick & Al Hussami, 2013).
References:
Ball, L. M., Leigh, D., & Loungani, P. (2013). Okun's law: fit at fifty? (No. w18668). National Bureau of Economic Research.
Burda, M., & Wyplosz, C. (2012). Macroeconomics: a European text. Oxford university press.
Cazes, S., Verick, S., & Al Hussami, F. (2013). Why did unemployment respond so differently to the global financial crisis across countries? Insights from Okun’s Law. IZA Journal of Labor Policy, 2(1), 10.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Ministry of Labour & Employment, GoI. (2017). Ministry of Labour & Employment | GoI. Labour.nic.in. Retrieved 24 May 2017, from https://www.labour.nic.in/
