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BPEA Article

Labor Force Structure, Potential Output, and Productivity

Abstract

ECONOMISTS HAVE ATTEMPTED TO ESTIMATE potential gross national
product for over a decade now. Potential GNP measures the output the
economy would produce if it were operating at some fixed, fairly low level
of unemployment, usually defined by an aggregate unemployment rate of
about 4 percent. The difference between potential and actual GNP at any
point in time is known as the GNP gap. In 1962, Arthur Okun published an
analysis that has been the benchmark for official measures of potential
GNP ever since, and in the process enunciated what came to be known as
Okun's law, which relates the unemployment rate to the percentage GNP
gap.' Potential GNP and Okun's law became two of the handiest tools of
analysis and presentation for economic stabilization problems. Particularly
during the first half of the 1960s, when GNP was running below potential
and policy was devoted to closing the gap, no sophisticated analysis of the
economy failed to identify the loss in real output that was associated with
an economy falling short of full employment.

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