Potential GDP is the state’s internal product, which can be provided in the maximum amount with full use of available resources.
This condition is called full employment. There is another concept - real GDP, for the formation of which manufacturers create and sell the necessary quantity of products for a certain time at various price levels. When analyzing macroeconomic indicators, it is customary to distinguish long-term and short-term periods. So, the behavior of economic entities in the long term can be described by the classical model. A free market without government intervention automatically ensures the use of resources in production, which leads to the achievement of potential GDP.
The value of potential GDP is determined depending on the amount of available technologies and resources, however, it may not depend on the price level. That is why the aggregate supply curve of a long-term nature is vertical.
Potential GDP obeys the law of neutrality of money. So, the vertical direction of the curve indicates the degree of security of output at the level of such GDP by the forces of the market and competition in the long run. In this case, the price level can have different values and depend on the amount of cash in the economy. And the other side of this economic law is that when there is high monetary emission, high prices can be traced, and in long-term planning, the money supply affects both prices and the volume of production.
With an increase in the number of resources in the economy, the development of technological progress is traced and, accordingly, the potential GDP increases, and its curve on the graph should shift to the right. But with the reduction of resources or technical regression, everything should happen the other way around.
A significant number of economists believe that GDP (actual and potential) can reflect a long-term period in macroeconomics. Moreover, deviations of the first type of domestic product from the second are quite successfully eliminated by the market.
However, modern economists have drawn conclusions about the existence of a short period (a quarter can serve as an example), in which the classical approach to the neutrality of money cannot work. In other words, any changes in the money supply have a significant impact on both the price level and potential GDP. Thanks to this statement, a new concept appeared - short-term GDP, to reflect the dynamics of which the aggregate supply curve is no longer vertically, but rather horizontally.
Such a curve reflects the possibility of increasing the ability of business entities to produce output at a certain price level. This fact is confirmed when there is a noticeable lag in actual GDP from its potential level. In other words, the domestic economy is not working at full strength.
