Potential GDP
Potential GDP is an economic term that refers to the maximum level of output that an economy can sustain without inflationary pressures. It is the level of output that an economy can produce when all of its resources are fully employed. Potential GDP is also known as the full-employment level of output. It is the level of output that an economy can achieve when all of its resources are being used efficiently and when there is no cyclical unemployment.
History of Potential GDP
The concept of potential GDP was first introduced by John Maynard Keynes in his 1936 book, The General Theory of Employment, Interest, and Money. Keynes argued that the level of output in an economy is determined by the level of aggregate demand. He argued that if aggregate demand is too low, then the economy will experience a recession. Conversely, if aggregate demand is too high, then the economy will experience inflationary pressures. Keynes argued that the level of aggregate demand should be equal to the level of potential GDP in order to achieve full employment.
Since Keynes’ time, the concept of potential GDP has been further developed by economists. In particular, economists have developed models to estimate potential GDP and to measure the gap between actual GDP and potential GDP. This gap is known as the output gap. The output gap is an important indicator of the health of an economy and is used by policymakers to determine the appropriate level of economic stimulus.
Table of Comparisons
| Actual GDP | Potential GDP |
|---|---|
| The level of output that an economy is currently producing. | The maximum level of output that an economy can sustain without inflationary pressures. |
| Determined by the level of aggregate demand. | Determined by the level of aggregate supply. |
| Can be higher or lower than potential GDP. | Always equal to potential GDP. |
Summary
Potential GDP is an economic term that refers to the maximum level of output that an economy can sustain without inflationary pressures. It is the level of output that an economy can achieve when all of its resources are being used efficiently and when there is no cyclical unemployment. The concept of potential GDP was first introduced by John Maynard Keynes in his 1936 book, The General Theory of Employment, Interest, and Money. Economists have since developed models to estimate potential GDP and to measure the gap between actual GDP and potential GDP. For more information on potential GDP, please visit the websites of the International Monetary Fund, the World Bank, and the U.S. Bureau of Economic Analysis.
See Also
- Aggregate Demand
- Aggregate Supply
- Output Gap
- Full Employment
- Cyclical Unemployment
- Inflationary Pressures
- Keynesian Economics
- Macroeconomics
- Gross Domestic Product
- Economic Stimulus
