I am learning about potential output. We have been told that it is the amount of output that an economy can produce when using its resources, such as capital and labour, at normal rates/maximum capacity. How could an expansion occur if using resources at maximum capacity is considered 'normal'?
Any answers would be greatly appreciated, thanks!
Potential output is the level of output achieved when all resources are employed and put to their most productive uses, and which can be sustained over the long term.
Expansion beyond the current level of potential output usually occurs through technological progress. This is a catch-all phrase that includes the invention of new machines, better education, improvement of workers' skills, etc.
It can also occur through an expansion of the labor force and capital stock (i.e. more workers, more "machines").
Another way it can occur is through overheating. A concrete (but not common) example of overheating would be if we forced everyone to work say 20 hours a day — this might achieve a temporary boost in output, but this is probably not sustainable over the long term. Similarly, we can overwork our machinery, livestock, and other capital goods, but again this would probably not be sustainable.
A more common example of overheating is during a speculative boom -- say a property boom, when due to overoptimism and other factors, we might have a period of a few years when new properties are built at a frenetic pace, so that potential output is exceeded. This, again, is not sustainable.
