In class we discussed that a decade ago the annual supply side growth rate was 3

Question

In class we discussed that a decade ago the annual supply side growth rate was 3%. The supply side growth rate has declined to 2% per year. In this assignment we calculate the impact on potential GDP due to the decline in supply side growth. Here is a table available at BEA.gov. It shows quarterly values for Real GDP from the first quarter of 2007 through the fourth quarter of 2015. Real GDP (S billion) 2007q1 14,726.0 2008q1 14,889.5 2009q1 14,375.0 2010q1 14,604.8 2011q1 14,881.3 2012q1 15,291.0 2013q1 15,457.2 2014q1 15,724.9 2015q1 16,177.3 2015q2 16,333.6 2015q3 16,414.0 2015q4 16,470.6

Explanation / Answer

answer 1) potential gdp=natural employment rate/actual employment rate *actual real gdp

When AD=AS this means resources are fully utised leading to no inflation

thus in 2007 there is no unemployment

growth rate= (16470.6-14726)/(14726)

=11.84

quarterly=2.96

By taking growth rate of 3% we get annual GDP=74617.82

quarterly=18654.45

output gap=18654.45-16470.6

=2183.85$

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