**Potential GDP**

Potential GDP is how much a country would produce if all of its resources were fully employed.

Typically, we assume that workers are the only resource in an economy which can be under-utilized*.

Therefore to calculate the potential GDP we wish to see how much actual GDP would be when we actually fully utilized all our workers - that is, there is no unemployment. However, instead of assuming that there is no unemployment, we look at the case where employment equals its natural rate of employment.

If you wish to see what determines the potential GDP (aka natural output) see this *post*.

**Potential GDP formula**

The formula for calculating potential GDP is:

Typically we observe the unemployment rate not the employment rate. Therefore, given that the we can calculate potential GDP as:

Now let's look at some examples.

**Example 1**

Consider an economy where the natural rate of employment is 95% and the actual rate of employment is 90% and the GDP of the economy is 1.13 trillion dollars. We would calculate the potential GDP as follows:

(recall percentages can be converted to decimal by dividing them by 100. e.g 95% = )

**Example 2**

Consider an economy where the natural rate of unemployment is 3% and the actual rate of unemployment is 5% and the GDP of the economy is 1.42 trillion dollars. We would calculate the potential GDP as follows:

First, calculate the rates of employment:

**The output gap**

The output gap (also known as GDP gap) is the difference between the potential GDP and actual GDP. The output gap formula is:

Output gap = Actual output - Potential output

In macroeconomics, output and GDP are used synonymously.

There is another formula that might be required which is the percentage GDP gap which is:

## Examples

in **Example 1 **above the output gap is:

the Percentage GDP gap is

(5%)

In **Example 2 **above the output gap is:

the Percentage GDP gap is

(2%)

When the output gap is negative the economy is said to be operating **Below capacity or "underheating"**. Conversely, when the output gap is positive the economy is said to be operating **above capacity or overheating.**

* Economies also employ "capital" which are machines etc. which can also be under-utilized. However, for simplicity we tend to assume that they are always fully utilized.

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sjwonPercentage GDP gap is [(acutal output) - (potential output)] ÷ (potential output)

(For detail, http://ec.europa.eu/economy_finance/publications/publication746_en.pdf)

kin0013You are correct, my apologies.

Bernabasits so much helpful, but how can i site the source please?

econ101helpUnless you are using a specific calculation, I don't think any citation would be required in this case.