[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

POTENTIAL GDP
Real GDP is a measure of how much the economy actually produces. But sometimes
workers may not be fully employed, and some plants and equipment may be operating
at less than normal capacity. At other times, the economy may produce more
than would normally be sustainable. Firms may put on extra shifts, increase overtime,
and delay maintenance in order to temporarily increase output. Another important
macroeconomic measure of real output, potential GDP, indicates what the
economy would produce if labor were fully employed at normal levels of overtime and
if plants and machines were used at their normal rates. Real GDP will fall below
potential GDP when the economy has above-normal levels of unemployed resources.
In some circumstances, real GDP can exceed potential GDP by a considerable
amount. Even when the economy is operating at its normal potential, some unused
capacity remains. By fully utilizing this capacity, the economy’s real GDP can temporarily
exceed its potential. Individuals may be willing to temporarily put in extra overtime;
other workers may take a second job when the labor market is particularly
strong. Such steps enable real GDP to be greater than would occur at more normal
levels of utilization and work hours. One common example of actual production greatly
exceeding the economy’s normal potential is when a country mobilizes for war. Figure
22.1 shows how real GDP and potential GDP have increased over the past forty years.
Output does not grow smoothly; the jagged progression in the figure shows the effects
of short-term fluctuations around an upward trend. Sometimes these fluctuations
10,000
9,000
BILLIONS OF 1996 DOLLARS
8,000
7,000
6,000
5,000
4,000
Potential
GDP
Real
GDP
3,000
2,000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
YEAR
Figure 22.1
POTENTIAL AND REAL GDP
Potential GDP measures how much the economy would produce if it used all its resources
at normal levels of overtime and capacity utilization. Real GDP shows what the economy
actually produces. Notice that both have been growing over time.
SOURCES: Bureau of Economic Analysis and Congressional Budget Office.
494 ∂ CHAPTER 22 MEASURING OUTPUT AND UNEMPLOYMENT