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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

What is on the horizontal axis of the AD/AS diagram? What is on the vertical axis?

Suppose the level of structural unemployment increases. How would you illustrate the increase in structural unemployment in the AD/AS model? Hint: How does structural unemployment affect potential GDP?

Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but not both?

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?

If the economy is operating in the Keynesian zone of the SRAS curve and aggregate demand falls, what is likely to happen to real GDP?
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