Potential output—the maximum amount an economy can produce over the long run—is an important indicator policymakers use to gauge a country’s current economic health and expectations for future growth.

During economic downturns an economy’s output of goods and services declines. When times are good, by contrast, that output—usually measured as GDP—increases (see “Gross Domestic Product: An Economy’s ...

The output gap measures how far the economy is from its full employment or “potential” level that depends on supply-side factors of the economy: the supply of workers and their productivity. During a ...