Potential Output
Potential output is a term used in economics to refer to the maximum amount of goods and services that can be produced in an economy at a given level of technology and resources. It is also known as the full-employment level of output, as it is the level of output that can be achieved when all available resources are fully utilized. Potential output is an important concept in macroeconomics, as it is used to measure the output gap, which is the difference between actual output and potential output.
History of Potential Output
The concept of potential output 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, which is the total amount of goods and services that people are willing to buy. If aggregate demand is greater than potential output, then the economy will experience inflationary pressures. Conversely, if aggregate demand is less than potential output, then the economy will experience deflationary pressures.
Since Keynes’ time, the concept of potential output has been further developed by economists such as Robert Solow and Paul Samuelson. They argued that potential output is determined by the level of capital and labor available in an economy, as well as the level of technology and productivity. In other words, potential output is determined by the amount of resources that can be used to produce goods and services.
Table of Comparisons
| Actual Output | Potential Output |
|---|---|
| The amount of goods and services that are actually produced in an economy. | The maximum amount of goods and services that can be produced in an economy at a given level of technology and resources. |
| Determined by aggregate demand. | Determined by the level of capital and labor available in an economy, as well as the level of technology and productivity. |
| Measured by the output gap. | Measured by the difference between actual output and potential output. |
Summary
Potential output is an important concept in macroeconomics, as it is used to measure the output gap, which is the difference between actual output and potential output. Potential output is determined by the level of capital and labor available in an economy, as well as the level of technology and productivity. For more information about potential output, you can visit websites such as Investopedia, The Balance, and the Federal Reserve Bank of St. Louis.
See Also
- Aggregate Demand
- Output Gap
- Full Employment
- Capital
- Labor
- Technology
- Productivity
- Inflation
- Deflation
- Keynesian Economics
