Module 19 of CT7 defines the full-employment level of GDP as: "The level of GDP at which there is no deficiency of aggregate demand". I am not confortable with this definition. I would see the full-employement level of GDP defined as: the GDP obtainable by using all available employee's resources working a normal capacity. I do not understand what is the link between agregate demand and employment level in the definition. In case of an inflationary gap, there is a problem of excess of demand. In such a situation, obviously there is no deficiency of aggregate demand, but the corresponding level of GDP is not a full-employement level of GDP, either. Can anybody help me with an explation? What is the manual wanting to say? Many thanks,
This definition of the full-employment level of GDP is fine if we are just looking at disequilibrium unemployment, in particular, demand-deficient unemployment. As long as there is adequate demand in the economy, there won't be any demand-deficient unemployment. If aggregate demand is too low, then we will have a deflationary gap and demand-deficient unemployment. If aggregate demand is too high, then we will have an inflationary gap (but no demand-deficient unemployment). The definition ignores other types of unemployment, eg structural or regional unemployment. Does this help?
Hi, I have had a read through of this as I am struggling with this also. It feels as though in the case where there is demand-deficient unemployment that this contradicts the definition of the full employment level of output, which states that there is no deficiency of aggregate demand? I would be grateful if someone could clear this confusion up. Thanks,
The full employment level of output is the output level at which there is no deficiency of aggregate demand and hence no demand-deficient unemployment. Any unemployment will be equilibrium unemployment, such as structural unemployment. Demand-deficient unemployment will occur when the actual level of output is below the full employment level, which will generally be the case in practice.
