Potential output

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In

real gross domestic product
(potential output) that can be sustained over the long term. Actual output happens in real life while potential output shows the level that could be achieved.

Limits to output

Natural (physical, etc) and institutional constraints impose limits to growth.

If actual GDP rises and stays above potential output, then, in a

natural resources, along with the limits of our technology and our management skills. Graphically, the expansion of output beyond the natural limit can be seen as a shift of production volume above the optimum quantity on the average cost
curve. Likewise, if GDP persists below natural GDP, inflation might decelerate as suppliers lower prices in order to sell more products, utilizing their excess production-capacity.

Potential output in

production–possibility curve
for a society as a whole, reflecting its natural, technological, and institutional constraints.

Resources utilization

Potential output has also been called the "natural gross domestic product." If the economy is said to be at a potential GDP level, the unemployment rate ostensibly equals the NAIRU (the "natural rate of unemployment"). There is great disagreement among economists as to what these rates actually are, while the concept itself of NAIRU is rejected by Post-Keynesians as non-valid.[1][2][3]

The difference between potential output and actual output is referred to as

output gap or GDP gap; it may closely track lags in industrial capacity utilization.[4]

Potential output has also been studied in relation Okun's law as to percentage changes in output associated with changes in the output gap and over time[5] and in decomposition of trend and business cycle in the economy relative to the output gap.[6]

Notes

  1. ^ Mitchell, William (2009). "The dreaded NAIRU is still about!"
  2. ^ Fullwiler, Scott (2010) [2011] "Treasury Debt Operations—An Analysis Integrating Social Fabric Matrix and Social Accounting Matrix Methodologies"
  3. The Financial Times
    , 19 January 2017
  4. ^ Betancourt, Roger (2008). "Capital Utilization" The New Palgrave Dictionary of Economics, Palgrave-Macmillan
  5. ^ Crespo Cuaresma, Jesús (2008). "Okun's Law", The New Palgrave Dictionary of Economics, Palgrave-Macmillan
  6. ^ Nelson, Charles R. (2008) "Trend/Cycle Decomposition", The New Palgrave Dictionary of Economics, Palgrave-Macmillan
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