Which measure represents the economy's potential output at full employment?

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Multiple Choice

Which measure represents the economy's potential output at full employment?

Potential GDP is the economy’s maximum sustainable level of output when resources are fully employed and unemployment is at its natural rate. It represents what the economy can produce on a long-run basis given current technology and capital, and it’s measured in real terms (prices held constant). Real GDP shows what is actually produced right now, which can be above or below that potential level due to the business cycle. Nominal GDP mixes output with current price changes, so it isn’t a clean measure of sustainable capacity. GDP is the broad measure of output overall, not specifically the sustainable, full-employment level. So the measure that represents the economy’s potential output at full employment is potential GDP, with any difference between actual GDP and potential GDP indicating an output gap.

Potential GDP is the economy’s maximum sustainable level of output when resources are fully employed and unemployment is at its natural rate. It represents what the economy can produce on a long-run basis given current technology and capital, and it’s measured in real terms (prices held constant). Real GDP shows what is actually produced right now, which can be above or below that potential level due to the business cycle. Nominal GDP mixes output with current price changes, so it isn’t a clean measure of sustainable capacity. GDP is the broad measure of output overall, not specifically the sustainable, full-employment level. So the measure that represents the economy’s potential output at full employment is potential GDP, with any difference between actual GDP and potential GDP indicating an output gap.

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