Is it crazy to think that real GDP is above potential real GDP?

Basic Effective Demand Limit, L = labor share index * 0.76

Effective demand on real GDP = rGDPeT/L (1 -(1 - 1/e)T/L)

Effective Demand Monetary rule with NGDP targeting = z(T² + L²) - (1 - z)(T + L) + (1+a)current core inflation + acore inflation average - 2acore inflation target

z = (2L + Natural real rate)/(2L² + 2L) ............................ T = capacity utilization*(1 - unemployment rate)
UT index = L - T ... (UT index goes to zero at limit of business cycle.)

New economic thinking... effective demand limit upon the utilization of labor and capital

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04/02/2013

Is it crazy to think that real GDP is above potential real GDP?

The equations of Effective Demand calculate that real GDP is above potential real GDP. Is that too crazy? (Here is the link...) But the dynamics of the economy fit the picture more and more everyday.

The thought then is this...

The path forward may not be a matter of raising real GDP, but of raising potential real GDP.

This puts the economy into a completely different focus at a time when the CBO is actually slowly lowering their calculation of potential real GDP. What if they end up lowering all the way down to the calculation that I have presented? That would be a lot of wasted time working on wrong solutions.

So, what would we do differently to raise potential real GDP, intead of just real GDP?

Posted by Edward Lambert on 04/02/2013 in recovery | Permalink

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Synopsis of Effective Demand

Data as of 3rdQ-2018
Effective Demand = $18.433 trillion
Real GDP = $18.671 trillion
Productive Capacity = $24.872 trillion
UT index is at effective demand limit = -0.92%
Effective demand limit = 74.1%
TFUR = 75.1%
ED Fed rate rule = 4.0%
Estimated Natural Real Interest rate = 2.3%
Short-term real interest rate = 2.8%

There is no recession for 3rdQ-2018. Chance of recession is growing as economy has now reached 2nd effective demand limit in this business cycle. I am forecasting that economic conditions will begin to contract in the second half of 2018.

Click on Graphs below to see updated data at FRED.

UT Index (measure of slack):