The Wikipedia defines potencial GDP as "the total capacity of a nation to produce goods and services". If this definition is correct than the potential GDP can only occur when the unemployment rate is 0, all the land is exploited for the purposes of production (agriculture, factories, roads so on.) and the infrastructure is not outdated.

Speaking primitively and according to the definition provided above, if country A still has some part of it covered by forests (i.e. not factories and roads) and part of the population (say 4 percent) are out of work, then potential output can not be reached i.e. output gap is negative. This hypothetical example describes basically all countries present in the real world.

However, OECD indicates (the link below) that number of countries (Belgium, Denmark, Czech Republic just to name a few) had their real GDPs above the potential. In non of the cases the unemployment rate is O or the land is fully exploited.


Are my assumptions wrong? How should I look to the potencial GDP?


1 Answer 1


That quote from Wikipedia page is not correct. Actually both OECD and also commonly in economic research we define potential GDP/output as:

Potential gross domestic product (GDP) is defined in the OECD’s Economic Outlook publication as the level of output that an economy can produce at a constant inflation rate. Although an economy can temporarily produce more than its potential level of output, that comes at the cost of rising inflation. Potential output depends on the capital stock, the potential labour force (which depends on demographic factors and on participation rates), the non-accelerating inflation rate of unemployment (NAIRU), and the level of labour efficiency.

Also note what’s written in Wikipedia was probably misunderstanding of the term full employment in economics, as potential GDP is often defined as a GDP at full employment of all resources. In economics full employment does not mean that unemployment rate is necessary 0, or that all resources are used.

In economics full employment is an economic situation in which all available factors of production (labor, capital land etc) are being used in the most efficient way possible.

Unemployment at full employment will still be positive number because even in case when all resources are used in the most efficient way possible some people won’t have work, some capital will just lay unused and some land will just lay unexploited.

Also, always when you look at data you should check the data’s own metadata/explanation for what’s measured not Wikipedia otherwise you won’t really understand what the statistics is showing you.

  • $\begingroup$ Thank you for the response. $\endgroup$
    – R_quester
    Mar 18, 2020 at 16:02
  • $\begingroup$ I used OECD data for exemplification purposes, it is not that I am working with it a the moment. I am more interested in concept of potential GDP as such. So if the potential GDP is " level of output that an economy can produce at a constant inflation rate" then adding up more workers, factories and/or land to the economy would imply that potential GDP increases, but so is the inflation rate. Which means that potential GDP changes over time depending of capital stock, number of people and ect.? $\endgroup$
    – R_quester
    Mar 18, 2020 at 16:10
  • $\begingroup$ @R_quester yes the potential level of output depends critically on what’s the capital stocks number of people and other resources $\endgroup$
    – 1muflon1
    Mar 18, 2020 at 16:12

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