Update on Potential Real GDP from the Effective Demand model

Here is the updated graph for potential real GDP as calculated by the effective demand model. (see dark blue line in graph)

Potential real GDP is still trending perfectly with the historic trend before the bubble years.

The potential real GDP in this graph is not the CBO potential real GDP, but rather the one calculated from the equation used in the effective demand model...

Potential real GDP = real GDP - $3000 trillion * (cu - els)/els

cu = capacity utilization... els = effective labor share (labor share: Business sector, 2005=100, * 0.78)... $3000 trillion is the amplitude constant for the business cycle in real 2005 $$ dollars.

The drop of the effective demand curve says that real GDP will not be returning to the potential real GDP  trend line before the crisis. The effective demand limit will see to that. There would have to be another bubble to do that, as happened in the late 90's.

(note: the exponential curve in the graph is best viewed with a 1.401 power term.)

Comments

[Steve Roth]

re: http://effectivedemand.typepad.com/ed/2013/04/effective-demand-increases-with-unemployment-huh-no-that-cant-be.html

Would it be correct to characterize this definition of effective demand as:

The demand that *would* exist if all these measures were unchanged, but capital and labor were fully utilized? I don't think that's quite right (?), but I'm trying for a formulation that's easier for people to wrap their brains around.

So it's actual GDP (revealed demand?) + "uncreated" demand? (i.e. uncreated by producers hiring and investing, not reaching for available but unrevealed demand?)

[Steve Roth]

Hi Edward:

Are you seeing comments here? Replying? I think you've approved one of mine, but others have never appeared.

Thanks,

Steve

[Steve Roth]

Ah, there they are. I also wonder about a further split -- capital/labor, yeah, but how about splitting capital into "real" and financial? cf the Income Distribution graph here:

http://www.washingtonsblog.com/2010/08/a-sustainable-level-of-bank-profits-appears-to-be-about-1-of-gdp-higher-bank-profits-lead-to-a-ponzi-economy-and-a-depression.html

And the financial vs. nonfinancial graph here:

http://www.ritholtz.com/blog/2013/05/all-empires-crash-soon-after-they-reach-their-peak/

I have a sense that lending/borrowing/debt are hidden and happening here in your model, but maybe not explicitly?