Generally, when an economics student is taking the introduction to Macroeconomics Theory the most commonly used word that will come out of the professor’s mouth is Gross Domestic Product (GDP). GDP is a term defined as the value of all final goods and serviced a country produces in a given period. This monetary value enacts as an indicator of how the overall economy is doing. However, two other factors play a role in what a sustainable economy looks like. These factors are 1) inflation: the change of prices over time and 2) the unemployment rate. In the eyes of economist’s, a healthy economy has a 3-4% GDP growth rate annually, inflation at 2%, and the unemployment rate at 5-6%.
Recently, the U.S. economy has been booming. The unemployment rate has been at about 4.8%, which suggest almost everyone who wants a job has one. Since the 2008 recession, the unemployment rate is at the lowest its been. On top of that, real GDP has been creeping up to the rate of PGDP (potential GDP). When we say that a stable economy has a 3-4% GDP rate it is usually referring to potential GDP, which is just the target rate of growth we want to see annually. Below is an image of the recent economic activity in the U.S. in terms of GDP growth.
According to the NYTimes, the economy only needs to grow only 2.5% more to reach the nations economic potential. However, there is also the potential to exceed the economic potential, which would result in an economic boom. This is possible because the Trump Administration has set a plan to grow at least 4% more this year. However, a question is raised. The only plausible way for the Trump Administration to grow the economy 4% is if there slack. Economic slack is the measure of quantity of unemployed resources. For a better understanding, a company has resources that can produce at a certain rate or for a certain amount of time, however, those resources aren’t being used to their full potential. This is only one example of slack and it becomes tricky to measure as you move to different sectors. With lots of positive movement in the economy, it will be interesting to watch the progression and the reaction from the FED and the Trump Administration.