Potential GDP refers to the maximum amount of goods and services an economy can produce when it is most efficient—that is, without causing inflation due to shortages of labor, capital, land, and entrepreneurship. It does not measure actual yearly production (which is actual GDP) and is not cyclical but rather represents an economy's capacity over time.

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Potential GDP

Question 196

Multiple Choice

Potential GDP

A) measures the actual production from year to year.
B) measures the maximum amount of production that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation.
C) is cyclical.
D) Both answers A and C are correct.

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