Real GDP and Potential GDP?

Question

True or False: An increase in (actual) real GDP implies an increase in an economy's capacity to produce (potential GDP).

Answer 1

TRUE.

bcoz real GDP produced when the economy is at full emplyment, and when the labor market is in equilibrium(Quantity labor demended=quantity supplied), the economy is at full employment and real GDP equals potential GDP.

WHAT EVIDENCE WOULD HELP DECIDE WHETHER THE CURRENT LEVEL OF GDP IS ABOVE OR BELOW ITS POTENTIAL LEVEL?

Answer 2

False, an increase in real GDP means either more efficent use of current resources or an increase in them.  While potential GDP relates to only the optimal production level.  If the increase in real GDP is caused by an increase in resources then their will be an increase in potential GDP. If real GDP is increased by more efficent use of resources, potential GDP will not increase.