Define potential GDP.
Understand the Problem
The question is asking for a definition of potential GDP, which refers to the maximum output an economy can produce when operating at full capacity without inflationary pressures.
Answer
Potential GDP is the estimated value of output when all resources are fully utilized.
Potential GDP is an estimate of the value of output that an economy would produce if it fully and efficiently employed all its available resources such as labor and capital.
Answer for screen readers
Potential GDP is an estimate of the value of output that an economy would produce if it fully and efficiently employed all its available resources such as labor and capital.
More Information
Potential GDP assumes full employment and optimal utilization of resources, omitting factors such as cyclical fluctuations and temporary economic disruptions.
Tips
Common mistakes include confusing actual GDP with potential GDP and not factoring in the role of resources being fully employed.
Sources
- What is potential GDP, and why is it so controversial right now? - brookings.edu
- Understanding Potential GDP and the Output Gap | St. Louis Fed - stlouisfed.org
- Economics 101: What Is Potential GDP and Why Does It Matter in Business and Economics - masterclass.com
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