Why It’s So Hard to Measure the Economy’s Real Potential

Economists lack a consensus method for calculating an economy's maximum sustainable output, also known as potential gross domestic product. The gap between actual GDP and potential GDP is difficult to quantify because potential output depends on assumptions about future productivity, labor force participation, and capital investment that cannot be directly observed. The Congressional Budget Office, Federal Reserve, and private forecasters each use different models and arrive at different estimates of potential growth rates. These varying estimates affect policy decisions on interest rates and government spending.

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