What is potential GDP?
A nations’ potential or natural gross domestic product is the highest level of output that can be sustained with current productive resources. Potential GDP is limited by the supply of labor, capital equipment, natural resources, technology and management resources. If actual GDP is above potential GDP, then inflation will typically result. Calculation of the nation’s potential GDP is based on “full employment” – when all available resources are being used for the production of goods and services. You may see references to “full employment GDP” or “full employment output.” The “GDP gap” is the difference between the potential GDP and actual GDP of the nation. If GDP fall below potential over some time, it may indicate that the economy is in a recession. Methods of Measurement GDP can be measured in three different ways. GDP can be measured as the sum of expenditures, or purchases, by final users. This is known as the expenditures approach, illustrated by the formula: GDP = C + I + G +
