Author
Paul Kutasovic
Abstract
In this manuscript, we discuss applicable models to estimate Potential GDP of a country. We also present potential estimation approaches. Estimation of Potential GDP is very important for policy makers. Generally, Potential GDP refers to the sustainable level of output for an economy. In the long-run, actual and potential GDP should grow at the same rate since grow in excess of potential requires using resources beyond their optimal levels. Thus, potential GDP sets the upper limit for an economy’s growth rate and raising the level of potential GDP is the key to increasing the income and standard of living of the population.
Introduction
Potential GDP refers to the sustainable level of output for an economy. In the long-run, actual and potential GDP should grow at the same rate since growth in excess of the potential growth rate requires using resources beyond their optimal levels. Thus, potential GDP sets the upper limit for an economy’s growth rate and raising the level of potential GDP is the key to increasing the income and standard of living of the population. What is of concern for economists and policymakers is that potential GDP or long-term growth, in both the advanced and developing economies, has slowed in recent years (Exhibit 1).