When presenting market research data (or watching others present data), I note often that folks fail to accurately differentiate between Actual GDP Growth and Potential GDP Growth. What does it mean?
Gross domestic product (GDP) has many different measurements, including real GDP and potential GDP, but those numbers are often so similar that it can be difficult to know the differences. Real GDP and potential GDP treat inflation differently, because potential GDP is based on a constant inflation while real GDP can change. Potential GDP is an estimate that is often reset each quarter by real GDP, while real GDP describes the actual financial status of a country or region. It is based on a constant inflation rate, so potential GDP cannot rise any higher, but real GDP can go up. As with the inflation rate, these GDP measurements treat unemployment either as a constant or as a variable.
Inflation (something we are likely to hear more about in the coming year), whether positive or negative, is a factor that constantly affects a country or region. While this is true, real GDP and potential GDP treat inflation differently, which often results in differences ranging from slight to major. With potential GDP, inflation is treated as a constant, so the rate never changes. When calculating real GDP, the actual inflation rate — which is prone to changing — is used. Potential GDP’s inflation rate is usually reset each quarter to the inflation rate that occurred with the real GDP.
J. Chris Parker