Understanding GDP and Potential Output

These flashcards cover key concepts related to Gross Domestic Product (GDP), potential output, the output gap, and their implications for economic policy.

What does GDP stand for, and what does it measure?

GDP stands for Gross Domestic Product, and it measures the total market value of all final goods and services produced in an economy in a given year.

What does real GDP account for?

Real GDP accounts for inflation and provides a more accurate reflection of actual economic growth.

What is potential output?

Potential output is an estimate of what an economy can feasibly produce when it fully employs its available economic resources.

What is the output gap?

The output gap is the difference between actual output and potential output, expressed as a percentage of potential output.

What happens during a negative output gap?

During a negative output gap, actual output is below potential output, indicating underutilization of resources and often correlating with recession.

What typically occurs in an economy during a positive output gap?

In a positive output gap, actual output exceeds potential output, indicating that the economy is fully employed and possibly overutilizing resources.

What role do policymakers play regarding the output gap?

Policymakers consider the output gap when determining economic stimulus needs, such as adjusting interest rates.

How does the Federal Open Market Committee (FOMC) respond to a negative output gap?

The FOMC is likely to lower its target range for the federal funds rate to stimulate the economy.

What were the economic consequences of inaccurate estimations of potential output during the 1970s?

Inaccurate estimations led the Federal Reserve to believe potential output was higher than it was, resulting in overly simulative policies that contributed to higher inflation.

What is the business cycle?

The business cycle refers to the fluctuating levels of economic activity in an economy over time, measured from the beginning of one recession to the next.