Potential GDP

Potential GDP means the level of economic output an economy can produce when using resources sustainably. In simple terms, it is the economy’s estimated normal capacity. Potential GDP is important because it helps economists judge whether the economy is overheating or underperforming. If actual GDP is above potential GDP, inflation pressure may rise. If it is below potential GDP, unemployment may be higher. For example, an economy can grow above potential for a while, but that may create price pressure if demand is too strong. Potential GDP is not the maximum possible output forever. It is an estimate of sustainable output based on labor, capital, and productivity.