Editing Potential output

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In [[economics]], '''potential output''' (also referred to as "'''natural gross domestic product'''") refers to the highest level of [[real vs. nominal in economics|real]] [[gross domestic product]] (potential output) that can be sustained over the long term. Actual output happens in real life while potential output shows the level that could be achieved.

==Limits to output==
Natural (physical, etc) and institutional constraints impose limits to growth. 

If actual GDP rises and stays above potential output, then, in a [[free market]] economy (i.e. in the absence of wage and [[price controls]]), [[inflation]] tends to increase as [[demand]] for [[factors of production]] exceeds [[supply and demand|supply]]. This is because of the [[Finite set|finite]] supply of workers and their time, of [[capital equipment]], and of [[natural resources]], along with the limits of our [[technology]] and our [[management]] skills. Graphically, the expansion of output beyond the natural limit can be seen as a shift of production volume above the optimum quantity on the [[average cost]] curve. Likewise, if GDP persists below natural GDP, inflation might decelerate as suppliers lower prices in order to sell more products, utilizing their excess production-capacity.

Potential output in [[macroeconomics]] corresponds to one [[Point (geometry)|point]] on the [[production–possibility curve]] for a society as a whole, reflecting its natural, technological, and institutional constraints.

==Resources utilization==
Potential output has also been called the "natural gross domestic product." If the economy is said to be at a potential GDP level, the [[unemployment]] rate ostensibly equals the [[NAIRU]] (the "natural rate of unemployment"). There is great disagreement among economists as to what these rates actually are, while the concept itself of NAIRU is rejected by [[Post-Keynesian economics|Post-Keynesians]] as non-valid.<ref>[[Bill Mitchell (economist)|Mitchell, William]] (2009). "[http://bilbo.economicoutlook.net/blog/?p=1502 The dreaded NAIRU is still about!]"</ref><ref>Fullwiler, Scott (2010) [2011] "[https://poseidon01.ssrn.com/delivery.php?ID=865073071082093106108103075104080123118075037049086025106123090112115005098114082103020013021100008051030005118117082101017107051055054015028083069009029000008087056058054093095066106087011105127093123108071109025090111068001065006101120082112005104&EXT=pdf Treasury Debt Operations—An Analysis Integrating Social Fabric Matrix and Social Accounting Matrix Methodologies]"</ref><ref>Clein, Matthew C. (2017) "[https://ftalphaville.ft.com/2017/01/19/2182705/debunking-the-nairu-myth/ Debunking the NAIRU myth]", ''[[The Financial Times]]'',  19 January 2017</ref>

The difference between potential output and actual output is referred to as [[GDP gap|output gap or GDP gap]]; it may closely track lags in industrial [[capacity utilization]].<ref>Betancourt, Roger (2008). [http://www.dictionaryofeconomics.com/article?id=pde2008_C000043 "Capital Utilization"] ''[[The New Palgrave Dictionary of Economics]]'', Palgrave-Macmillan</ref>

Potential output has also been studied in relation [[Okun's law]] as to percentage changes in output associated with changes in the output gap and over time<ref>Crespo Cuaresma, Jesús (2008). [http://www.dictionaryofeconomics.com/article?id=pde2008_O000098 "Okun's Law"], ''The New Palgrave Dictionary of Economics'', Palgrave-Macmillan</ref> and in [[Decomposition of time series|decomposition]] of trend and [[business cycle]] in the economy relative to the output gap.<ref>Nelson, Charles R. (2008) [http://www.dictionaryofeconomics.com/article?id=pde2008_T000221 "Trend/Cycle Decomposition"], ''The New Palgrave Dictionary of Economics'', Palgrave-Macmillan</ref>

==See also==
* [[List of countries by GDP (nominal) per capita|GDP per capita]]

==Notes==
{{Reflist}}

[[Category:Macroeconomic aggregates]]
[[Category:Management cybernetics]]
[[Category:Price controls]]