Potential GDP and its difference from the actual domestic product

Potential GDP is an internal product of the state, which can be provided to the maximum extent with full use of available resources. This condition is called full employment. There is also another notion - real GDP, for the formation of which manufacturers create and sell the required quantity of products for a certain time at different price levels. When analyzing macroeconomic indicators, it is customary to allocate long-term and short-term periods. Thus, the behavior of economic entities in the long run can be described by the classical model. A free market without state intervention automatically ensures the use of resources in production, which leads to the achievement of potential GDP.

The amount of potential GDP is determined depending on the size of available technologies and resources, but it can not depend on the level of prices. That is why the curve of the aggregate supply of a long-term character is located vertically.

The potential GDP is subject to the law of money neutrality. Thus, the vertical direction of the curve indicates the degree of availability of output at the level of such GDP by market forces and competition in the long run. Thus the price level can have various values and depend on volume of money resources in economy. And the other side of this economic law - in the presence of high monetary emission , high prices can be traced, and in the long-term planning the money supply influences both prices and production volume.

With the increase in the amount of resources in the economy, the development of technical progress is traced and, accordingly, the potential GDP increases, and its curve on the graph should shift to the right. But with a reduction in the amount of resources or technical regression, everything should happen the other way around.

A significant number of economists believe that GDP (actual and potential) can reflect a long-term period in macroeconomics. In this case, the deviations of the first type of domestic product from the second are quite successfully eliminated by the market.

However, modern economists have drawn conclusions about the existence of a brief period (an example can serve as a quarter), in which the classical approach to the neutrality of money can not work. In other words, any changes in the volume of the money supply have a significant impact, both on the price level and on the potential GDP. Thanks to this statement, a new concept has emerged - short-term GDP, to display the dynamics of which the aggregate supply curve is no longer vertical, but rather horizontally located.

Such a curve reflects the possibility of increasing the ability of economic entities to produce products at a certain price level. This fact is confirmed when there are noticeable laggings of the actual GDP from its potential level. In other words, the domestic economy does not work in full force.