Potential Real GDP vs Actual Real GDP and the PPF.

Here is a  nice illustration of "Potential Real GDP" vs "Actual Real GDP.  Potential GDP is an estimate at a given point in time of an economy's potential to produce Real GDP given its available resources (Land, Labor, Capital, Entrepreneurship).  Gives me an opportunity to show how two important AP Macroeconomic concepts are related to each other.

The Congressional Budget Office (CBO) publishes a forward looking projection of Potential RGDP years in advance.  This graphic gives the estimated trajectory of Potential RGDP that was calculated in a given year (2007,09,11,13,15, and 2017).  The heavy BLACK line is the trajectory of the "Actual RGDP" that was recorded in the respective year.

It is evident Actual RGDP, since the advent of the 2008 recession has been below the projected Potential---the difference is known as the "Output Gap".

It is noteworthy that after 2008 the CBO consistently lowered the estimate of the US economy's potential to produce Real GDP.

Source: VOXEU

Below I paired this graphic with the Production Possibilities Frontier (PPF).  The PPF is an important model in AP Macro.

I color coded the PPF frontiers in a similar color as the one in the graphic to show the contraction of the US PPF over time (as calculated by the CBO).  I used Point "A" to represent the heavy black line and a consistent under-utilization of societal resources, shown as a point inside the PPF.

Both of these models show the same thing---an output gap that suggests more resources could be put into use before we reach our economic potential.

A couple of nice graphs showing a link between Capital Stock and Economic Growth---Hey, STOP yawning and find out why this is important!!!

Here are a couple of graphs that help illustrate an important concept in AP Macroeconomics---the relationship between "Capital Stock"(or Stock of Capital) and economic growth.  Capital Stock, simply, is "the stuff you use to make other stuff"--Tools/Equipment that produce goods/services but also help workers be more productive.  The assumption is as more Captial Stock is employed, in terms of quanitity and quality, the higher future economic growth will be (Actual and/or Potential Economic Growth).  

Source: Conversable Economist

The graphs from this study compare the use of capital in IT (Information Technology) by multinational corporations in the US and Europe (the top graph--Capital Employed-Per Labor Hour Worked) and the potential effect on overall productivity (the bottom graph--Output Per Labor Hour Worked) between the two geographical areas.

I inserted the Red Line at the year 2000 just to get a before and after perspective.  I did not post these to prove anything on a large scale. There are/could be many other variables affecting productivy between the continents.  However, I believe some of the difference in productivity gains can be attributed to a  higher level of Capital Stock employment and the effective use of that Capital in producing goods and/or services.

Actual Real GDP vs Potential Real GDP...VERY nice interactive graph for this IMPORTANT concept

     These graphs below are part of an interactive available HERE on the relationship between ACTUAL RGDP and POTENTIAL RGDP.  In addressing the problems in our economy, it is critical to understand the difference between the two.  I can see the Production Possibilities Frontier, Short-Run Aggregate Supply and Long Run Aggregate Supply implicitly and explicitly through-out.  I have copied and pasted the two most important parts below, but if you go to the link you can build the models yourself step by step. 
     In the first graph, the ideal situation is for the lines to run parallel to each other with no gap. This means that our actual GDP production is equal to our potential to produce GDP given our resources and full-employment of those resources (people first and foremost).  When you see blue, we are actually producing beyond our potential. Unemployment is very low, which can be a good or bad thing  (more on that in class). Where you see pink, it means actual GDP is below potential GDP---we are in a recession and unemployment is high. This is where we currently find ourselves.

Graph copied from Ezra Klein

     This second graph below shows the data from the graph above PLUS how unemployment would be affected given different GDP growth rates.  If our GDP increased at an annual rate of 6% we would reach the Natural Rate of Unemployment("NRU") of 5% rather quickly (2012). The NRU is considered the lowest unemployment rate we should reach if we are fully employing all our resources.  It is impossible to reach an actual unemployment rate of 0%. There is always some frictional and structural unemployment no matter how good the economy might be performing.  However, NO reputable economist is predicting that high a growth rate anytime soon.  It seems more likely we will be in between 2%-3% average growth rate for the foreseeable future and we won't reach full-employment until the mid to late 20-teens.  Hmm...about the time the class of 2011 graduates from college...that is the good news...

Graph copied from Ezra Klein

""Compared with a healthy economy, about 7 million working-age people and 5 percent of the nation’s industrial capacity are sitting idle, not producing what they could. The economy is growing again, but at a rate — less than 2 percent in recent months — that’s too slow to keep up with a population that keeps increasing and workers who keep getting more efficient.
This is the output gap, the divide between the amount the United States can produce and what it is actually producing. The gap, currently $900 billion, explains why we feel so miserable more than a year into what is technically classified as an economic recovery.""