potential gross national product

Potential gross national productclick for a larger image
Fig. 145 Potential gross national product. The difference between potential GNP and actual GNP.

potential gross national product

the maximum level of real output an economy is capable of producing at a point in time by fully utilizing all available FACTOR INPUTS. Productive potential depends upon the size of the LABOUR FORCE and the average level of labour PRODUCTIVITY (that is, output per man). The level of productivity itself is dependent on the current state of technology, the amount of CAPITAL STOCK per worker and the CAPITAL OUTPUT RATIO. Potential gross national product interacts with the level of AGGREGATE DEMAND to determine the level of ACTUAL GROSS NATIONAL PRODUCT in an economy. If aggregate demand falls short of potential GNP at any point in time, then actual GNP will be equal to aggregate demand, leaving a DEFLATIONARY GAP (output gap) between actual and potential GNP. However, at high levels of aggregate demand (in excess of potential GNP), potential GNP sets a ceiling on actual output, any excess of aggregate demand over potential GNP showing up as an INFLATIONARY GAP.

Potential GNP will tend to grow over time as a result of increases in the labour force and labour productivity (see SUPPLY-SIDE ECONOMICS). Fig. 145 shows the (hypothetical) path followed by potential GNP over time in the form of a broken line. The rate of growth of annual output (GNP) over time (ECONOMIC GROWTH), shown by the solid line, will depend upon both potential GNP and the rate of growth of aggregate demand. When aggregate demand matches (or exceeds) potential GNP, as at points A and C in the figure, the economy's resources are fully employed and maximum output of goods and services is achieved. When aggregate demand falls short of potential GNP, as at points B and D, some of the economy's resources are left unemployed (see UNEMPLOYMENT) or underemployed. When aggregate demand exactly matches potential GNP, a full employment equilibrium level of aggregate demand exists.

In practice the level and rate of growth of potential GNP are difficult to measure. See also BUSINESS CYCLE.

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