Definition
- Potential output
- Potential output, or potential GDP, is the maximum quantity an economy can produce given full employment of its existing labour, physical capital, technology and institutions.
- Not to be confused with: Natural rate of unemployment
- The natural rate of unemployment is the rate that would exist in a growing and healthy economy from the economic, social and political factors of the time.
Test yourself
What is the difference between potential output and natural rate of unemployment?
Potential output is the most the economy can produce; the natural rate is the unemployment still left when it produces that much.
Learn it properly: the module
Also in: Actual and potential growth, Macroeconomic equilibrium in the AD/AS model