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In economics, potential output (also referred to as “natural gross domestic product”) refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. The existence of a limit is due to natural and institutional constraints. If actual GDP rises and stays above potential output, then (in the absence of wage and price controls) inflation tends to increase as demand exceeds supply. This is because of the limited supply of workers and their time, capital equipment, and natural resources, along with the limits of our technology and our management skills. Graphically, the expansion of output beyond the natural limit can be seen as a shift of production volume above the optimum quantity on the average cost curve. Likewise, if GDP is below natural GDP, inflation will decelerate as suppliers higher prices to fill their excess production capacity.

Potential output in macroeconomics corresponds to one point on the production possibilities frontier (or curve) for a society as a whole seen in introductory economics, reflecting natural, technological, and institutional constraints.

Potential output has also been called the “natural gross domestic product.” If the economy is at potential, the unemployment rate equals the NAIRU or the “natural rate of unemployment.”

Generally speaking, most central banks and other economic planning agencies attempt to keep GDP at or around the natural GDP level. This can be done in a number of ways: the two most common strategies are expanding or contracting the government budget (fiscal policy), and altering the money supply to change consumption and investment levels (monetary policy).

Gross Output is an economic concept used in national accounts such as the United Nations System of National Accounts (UNSNA) and the US National Income and Product Accounts (NIPA). It is equal to the value of net output or GDP (also known as gross value added) plus intermediate consumption.

Gross Output represents, roughly speaking, the total value of sales by producing enterprises in an accounting period (e.g. a quarter or a year), before subtracting the value of intermediate goods used up in production. This description is not quite accurate though, among other things because flows relating to government services and households are also included.

To obtain a measure of gross value added or Net output, the value of intermediate goods and services must be subtracted from Gross Output. Net value added is obtained by additionally subtracting consumption of fixed capital (depreciation).

The statistical definition of Gross Output is dependent upon the definition of production applied. Typically some economic flows and activities are excluded from coverage in calculating the value of Gross Output, on the ground that they are unrelated to production in the domestic economy. These include foreign transactions, property income, transfers, and various government disbursements, unpaid housework and voluntary work. On the other hand, items are included which some economists would regard as spurious, such as the imputed rental value of owner-occupied housing (this is the average rents, at market rates, which owners of residential housing would receive if they rented out the housing they occupy).

See also

• GDP
• Intermediate consumption
• Net output
• United Nations System of National Accounts (UNSNA)
• National accounts

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