Economy's potential output

Definition

The economy's potential output represents the maximum amount of goods and services an economy can produce when all resources (such as labor and capital) are fully utilized without causing inflationary pressures.

Related terms

Aggregate supply: Aggregate supply is the total quantity of goods and services that all industries in an economy are willing to produce at different price levels.

Output gap: The output gap measures the difference between the actual level of economic output and the economy's potential output. A positive output gap indicates that an economy is operating above its potential, while a negative output gap suggests it is operating below its potential.

Full employment: Full employment exists when all available labor resources in an economy are utilized, meaning there is no cyclical unemployment.