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Chapter 11: 26 (page 292)

What is potential GDP?

Short Answer

Expert verified

Potential GDP is at full employment, an economy can produce its maximum quantity of production.

Step by step solution

01

Concept introduction 

Gross Domestic Product is the market value of all final goods being produced and services being provided.

02

Explanation

Potential GDP attempts to estimate the optimum output level or the highest level of output an economy can achieve or sustain over time, rather than just representing the final market value of all commodities and services manufactured within the country's domestic border. The concept of potential GDP revolves around the concept of sustainability.

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Most popular questions from this chapter

Hydraulic fracturing (fracking) has the potential to significantly increase the amount of natural gas produced in the United States. If a large percentage of factories and utility companies use natural gas, what will happen to output, the price level, and employment as fracking becomes more widely used?

How is pressure for inflationary price increases shown in an AD/AS model?

Suppose, after five years of sluggish growth, the European Union's economy picks up speed. What would be the likely impact on the U.S. trade balance, GDP, and employment?

Would a shift of AD to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of AD to the left?

Suppose the U.S. Congress passes significant immigration reform that makes it more difficult for foreigners to come to the United States to work. Use the AD/AS model to explain how this would affect the equilibrium level of GDP and the price level.
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