Full-employment output

Definition

Full-employment output refers to the level of production achieved when an economy operates at its full capacity, utilizing all available resources without causing inflation. This concept is closely linked to the Long-Run Aggregate Supply (LRAS), which is vertical at this output level, indicating that in the long run, the economy can produce this output regardless of the price level. At full-employment output, the economy is considered to be at a natural rate of unemployment, where only frictional and structural unemployment exists.

5 Must Know Facts For Your Next Test

1. Full-employment output is associated with a stable inflation rate since it reflects an economy operating efficiently without overheating.
2. In the long run, full-employment output is determined by factors such as technology, resources, and institutional structures rather than demand.
3. When an economy is below full-employment output, it indicates underutilization of resources, often leading to higher unemployment rates.
4. Economists use the LRAS curve to illustrate that in the long run, the economy's output remains constant regardless of changes in the price level.
5. Policy measures aimed at increasing aggregate demand may temporarily raise output above full-employment levels but can lead to inflation in the long run.

Review Questions

• How does full-employment output relate to the concepts of unemployment and aggregate demand?
  • Full-employment output connects directly to unemployment by indicating the natural rate where only frictional and structural unemployment exist. When an economy operates at this level, it means that all available resources are used efficiently. Aggregate demand plays a crucial role as shifts in demand can temporarily affect output and employment levels, but in the long run, they cannot change the full-employment output, which is determined by supply factors.
• Discuss how shifts in the LRAS curve impact the economy's potential for full-employment output.
  • Shifts in the LRAS curve can indicate changes in an economy's potential for full-employment output. For instance, an outward shift may occur due to technological advancements or an increase in resources, allowing for greater production capacity. Conversely, if there is a decline in available resources or productivity, the LRAS curve may shift inward, reducing potential GDP and reflecting lower full-employment output. This highlights how structural changes in an economy can directly affect its long-term growth potential.
• Evaluate how government policies can influence full-employment output and their implications for long-term economic stability.
  • Government policies aimed at stimulating aggregate demand can influence short-run outputs but have limited effects on long-term full-employment output. For example, expansionary fiscal or monetary policies might temporarily boost economic activity above its natural level, leading to a reduction in unemployment. However, if these policies are not matched with increases in productive capacity, they may result in inflationary pressures without achieving sustainable economic growth. Thus, while government intervention can provide short-term relief, fostering conditions that enhance productivity and resource efficiency is vital for maintaining long-term stability at full-employment output.

Related terms

Natural Rate of Unemployment:

The level of unemployment that exists when the economy is at full-employment output, consisting mainly of frictional and structural unemployment.

Aggregate Demand: The total demand for goods and services in an economy at a given price level, influencing short-run economic fluctuations but not affecting long-run output.

Potential GDP: The maximum possible output an economy can produce when utilizing its resources efficiently, synonymous with full-employment output.