potential gross national product for over a decade now. Potential GNP measures the output the economy would produce if it were operating at some fixed, fairly low level of unemployment, usually defined by an aggregate unemployment rate of about 4 percent. The difference between potential and actual GNP at any point in time is known as the GNP gap. In 1962, Arthur Okun published an analysis that has been the benchmark for official measures of potential
GNP ever since, and in the process enunciated what came to be known as
Okun's law, which relates the unemployment rate to the percentage GNP gap.' Potential GNP …show more content…
The attempts over the last decade to quantify potential output have focused attention on two important matters: the implications, in terms of lost output, incomes, and revenues, of operating the economy below its potential level; and the changes that could be expected in the growth rate of the economy's potential as a result of changes in the factors that underlie it.
Corresponding to the two kinds of analytic insights just mentioned are two basic ways of approaching the measurement of potential output. One can analyze the relation between the GNP gap and the unemployment rate at any moment of time. This approach involves estimating the differences in employment, averagehours worked by each employee, and average productivity of each employee that would accompany the difference between the actual and target unemployment rate. Or one can start from a benchmark period for which potential output is known, and estimate the changes in potential output for other years from information about the sources of these changes. Although some fairly elaborate models of economic growth have been used