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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

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

What impact would a decrease in the size of the labor force have on GDP and the price level according to the AD/AS model?

The short run aggregate supply curve was constructed assuming that as the price of outputs increases, the price of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?

Briefly explain the reason for the near-horizontal shape of the SRAS curve on its far left.

If new government regulations require firms to use a cleaner technology that is also less efficient than what they previously used, what would the effect be on output, the price level, and employment using the AD/ AS diagram?
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