Question

4. Briefly explain what is meant by the term "potential GDP," and identify the alternative term that is considered to be synonymous from a macroeconomic perspective with "potential GDP." Potential GDP is defined as the maximum quantity that an economy can produce given its existing levels of labor, physical capital, and technology, in the context of its existing market and legal institutions. Potential GDP is also called full-employment GDP.

Answer 1

Potential GDP is an economy is the output level were the economy is in the long run equilibrium, that is the maximum level that the economy can produce with the given labor force, capital and technology. The potential GDP of the nation increase or decreases depending on the events in the economy like an invention in the economy will increase the potential GDP in the market.

It is also called the GDP at full level of employment because at full GDP the cyclical unemployment is zero.