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How does the misery index work?

The Misery index is an economic indicator gifted by economist Arthur Okun to the world. The index helps in calculating how an average citizen is doing economically. The index is calculated by adding the annual inflation rate to the unemployment rate annually. Let’s take a look at how it works.

  • John F. Kennedy came into office on January 1961 during the time of a deep recession. Unemployment was going up and the stocks & profits were down. Though he was tragically assassinated in 1963, Kennedy has been credited with policies that led to the recovery. Kennedy wasn’t alone, he was assisted by some wizards of his Council of Economic Advisers (CEA) who were able to convince him about the combined policies that would do the trick.
  • Among the advisers, was Arthur Okun who. He discovered the bridge that connected the country’s gross national product (GNP) and its unemployment. By using the data from 1948 to 1960, he showed that GNP rises 3% for every percentage that unemployment falls. He also pointed out that the law holds situations when the unemployment rate is between 3 and 7.5 percent. This came to be known as Okun’s Law which facilitated CEA’s argument for tax cuts at times of recession.
  • But the boom didn’t last long and things slid downhill in the 70s. So, Okun came up with another invention called The Misery Index. He became the chairman of CEA during the 1970s. The US aided Israeli forces when the Arab countries led an invasion of Israeli territory. In response, the Arab coalition imposed an embargo on the exports of oil in the US and any other country that supported Israel.
  • During that time, the US was in high need of oil suppliers and the abrupt shutting down of exports brought an enormous shock to the government. Oil prices increased by 37 percent. Demand outstripped supply and the country got inflation. Also, there was a rise in unemployment.
  • Misery was all over the country. During the time of unemployment and inflation, Okun was all geared up for finding a new method for measuring the state economy.

The Misery Index of Okun provided a snapshot of the economy giving a sense of how people and the economy of the country are doing. Through the help of the index, Okun was able to measure previous economies against the present.

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