Minding the Output Gap: What Is Potential GDP and Why Does It Matter?

Scott Wolla

Page One Economics Newsletter, 2021

Abstract: Potential output is an estimate of what the economy could produce. Actual output is what the economy does produce. If actual is below potential -- a negative output gap -- there is "slack" in the economy. If actual is above potential -- a positive output gap -- resources are fully employed, or perhaps overutilized. This issue of Page One Economics explains how the output gap is useful for checking the health of the economy. It also points out how errors in the estimation of potential real GDP can reduce the effectiveness of policy.

Keywords: GDP; business cycles; federal funds rates; fomc; full employment; inflation; real GDP; potential output; stimulus (search for similar items in EconPapers)
Date: 2021
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