​Which of the following economic identities states that One (1) extra percent unemployment costs two (2) percent of the Gross Domestic Product (GDP)?​

Correct option is D

The correct answer is Okun's Law, which quantifies the relationship between unemployment and output (GDP). According to this law, for every 1% increase in the unemployment rate, a country's GDP will be roughly 2% lower than its potential GDP. This negative correlation highlights how macroeconomic output suffers due to labor underutilization.

This relationship was first observed by Arthur Okun, an economist in the 1960s. Okun's law is not a strict rule but an empirical observation based on U.S. data. It is often expressed as:

GDP Loss (%) = c × (Unemployment Rate Increase)

Where c ≈ 2, though this coefficient may vary by country or over time.

Thus, the statement "One extra percent unemployment costs two percent of GDP" is a direct application of Okun’s Law.

Information Booster:

• Okun’s Law describes the trade-off between unemployment and economic output.

• The coefficient (around 2) suggests a 2% fall in GDP for every 1% rise in unemployment.

• It helps policymakers quantify the cost of joblessness in terms of lost output.

• Used by central banks and governments to design fiscal/monetary responses.

• Relevant in recessionary or recovery phases to estimate output gaps.

• Serves as a guide for employment-centric growth policies.

• It links labor market slack directly with economic performance.

Additional Knowledge:

(a) Sacrifice Ratio:
Refers to the cost of reducing inflation in terms of lost output or increased unemployment. It indicates how much GDP must be sacrificed to reduce inflation by 1%. It does not directly relate unemployment to GDP loss, hence incorrect.

(b) Phillips Curve:
Shows an inverse relationship between inflation and unemployment. It does not establish a quantitative link between GDP and unemployment, making it incorrect for this question.

(c) Misery Index:
This is the sum of the unemployment rate and the inflation rate, used to indicate overall economic discomfort. It does not relate unemployment to GDP loss, so it is not relevant to this identity.