Definition
Potential Output
Potential output is the maximum sustainable level of production an economy can achieve at full employment of resources without accelerating inflation.
Potential output reflects an economy's supply-side capacity, determined by its labour force, capital stock and productivity. Actual output above it overheats the economy; below it leaves resources idle.
Raising India's potential output is the long-run goal of structural reforms, infrastructure investment and skilling, since it lifts non-inflationary growth. The gap between actual and potential output (the output gap) guides how aggressively the RBI sets policy at any moment.
Related terms
- GDP (Gross Domestic Product)GDP is the total value of all goods and services produced within a country over a period, the broadest single measure of how big and how fast an economy is growing.
- NAIRUNAIRU is the non-accelerating inflation rate of unemployment, the jobless rate at which inflation stays stable; below it, inflation tends to rise.
- Output GapThe output gap is the difference between an economy's actual output and its potential (full-capacity) output, signalling whether it is overheating or underperforming.
- Comparative AdvantageComparative advantage is the principle that countries gain by specialising in goods they produce at the lowest opportunity cost and trading for the rest, even if one is better at everything.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.