Potential gdp
The output an economy can produce with its labour and capital fully employed without pushing inflation up. It is not observed, and its growth sets the long-run trend for earnings and asset returns.
Where you will meet it
Potential gdp appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Explain how long-run stock market gains relate to the economy's sustainable rate of growth
“Neither ratio can rise without limit, because profits cannot exceed GDP and multiples cannot expand forever, so over long horizons equity appreciation converges to nominal potential GDP growth, real growth plus inflation.”
- Explain how an assessment of trend economic growth feeds into long-run forecasts for asset returns
“Potential GDP growth equals labour force growth plus labour productivity growth, or in growth accounting terms %ΔY = %ΔA + α × %ΔK + (1 − α) × %ΔL.”
- Explain why equity and fixed income investors care about potential GDP and how fast it grows
“Potential GDP is the output an economy can produce with its resources fully employed, and its growth rate is the speed limit for sustainable expansion.”
- Show how growth accounting can be used to forecast potential GDP
“With a Cobb–Douglas function and α as capital's share of income, potential GDP grows at g = TFP growth + α × capital growth + (1 − α) × labour growth.”
Practise it
Practise potential gdp until it is automatic: questions that explain every wrong option.
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