Okun's Law vs Phillips Curve
Okun's Law and Phillips Curve are related concepts in AP Economics that students often mix up. In short: okun's law is okun's law is the observed relationship that each extra percentage point of cyclical unemployment is associated with roughly a 2% fall in real GDP below potential. Meanwhile, phillips curve is the Phillips curve shows the short-run inverse relationship between the inflation rate and the unemployment rate. Here is how they compare side by side.
Okun's law is the observed relationship that each extra percentage point of cyclical unemployment is associated with roughly a 2% fall in real GDP below potential.
It links the labor market to output: when unemployment rises above its natural rate, GDP falls below potential by a multiple of that gap. The exact ratio varies, but it shows the large output cost of high unemployment.
The Phillips curve shows the short-run inverse relationship between the inflation rate and the unemployment rate.
In the short run, lower unemployment tends to come with higher inflation, giving policymakers a trade-off. The long-run Phillips curve is vertical at the natural rate of unemployment, so there is no permanent trade-off—pushing unemployment below the natural rate only raises inflation. It is the inflation–unemployment counterpart of the AD-AS model.
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