Actual GDP refers to the GDP that the economy produces in a given year. It is the sum of the market values of final goods and services actually produced. Potential GDP , on the other hand, refer to that level of GDP (or that amount of goods and services) which the economy could produce by making full use of its resources. This is that GDP which could be produced by full employment of labor, capital and other resources and productive capacity of the economy. Fuller utilisation of resources or full employment means that no resources remain idle or unutilised or that all resources are fully used their normal rates of utilisation. Potential GDP is also called Full employment level of GDP and is denoted by the symbol Y*. The difference between the potential GDP (Y*) and the actual GDP (Y) is called output gap or GDP gap. Thus,
GDP gap = Y* - Y
When the economy is operating at full employment level , this GDP gap is zero Existence of GDP gap (gap > 0) shows that economy’s resources are not being fully utilised and thus there exist unused resources in the form of unemployed labor, idle capital, raw materials and other production inputs. The economy, in such a state has attained equilibrium at less than full employment level, also called the under employment equilibrium.
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