DEFINITION of 'Below Full Employment Equilibrium'

Below full employment equilibrium is a macroeconomic term used to describe a situation where an economy's short-run real gross domestic product (GDP) is lower than that same economy's long-run potential real GDP. Under this scenario, there is a recessionary gap between the two levels of GDP (measured by the difference between potential GDP and current GDP) that would have been produced had the economy been in long-run equilibrium. An economy in long-run equilibrium is experiencing full employment. When an economy is not in full employment, it cannot produce what it would have were it in full employment. That output gap is caused in part by the employment shortfall.

BREAKING DOWN 'Below Full Employment Equilibrium'

When an economy is currently below its long-run real GDP level, there will be economic unemployment of resources, which will lead to an economic recession. The long-run real GDP level represents what an economy can produce had it been under full employment.

Full employment means the economy is utilizing all input resources (labor, capital, land, etc.) to its fullest potential. At full employment, there will still be natural unemployment in the labor market. This is unavoidable.

RELATED TERMS
  1. Inflationary Gap

    An inflationary gap is a macroeconomic condition describing the ...
  2. Recessionary Gap

    A recessionary gap is a macroeconomic term that describes the ...
  3. Real Economic Growth Rate

    The real economic growth rate is measure of economic growth expressed ...
  4. Economic Equilibrium

    Economic equilibrium is a condition or state in which economic ...
  5. Competitive Equilibrium

    A competitive equilibrium is when profit-maximizing producers ...
  6. General Equilibrium Theory

    General equilibrium theory studies supply & demand fundamentals ...
Related Articles
  1. Insights

    How to Calculate the GDP of a Country

    The GDP of a country can be calculated using two different approaches. GDP or gross domestic product of a country provides a measure of the monetary value of the goods and services that country produces ...
  2. Insights

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  3. Insights

    How Is the GDP of India Calculated?

    India is a front-runner among developing economies. Investopedia explains how India calculates its GDP, an indicator of economic health and performance.
  4. Insights

    Nominal vs. Real GDP

    GDP stands for gross domestic product and is the measure of the total economic output of the goods and services of a country.
  5. Insights

    Healthiest And Safest European Economies

    Economic indicators are to economists what symptoms are to doctors: signs of the relative well-being of the patient.
  6. Insights

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  7. Insights

    Economic Indicators That Affect The U.S. Stock Market

    Macroeconomic factors like GDP, Inflation, and Retail Sales affect the value of your portfolio. Understanding these economic indicators is vital for every investor in the marketplace.
  8. Investing

    Can Global Investors Profit From GDP Watching?

    GDP growth is not necessarily a solid indicator of stock market returns in emerging markets. Find out what to watch instead.
  9. Insights

    The Hidden Truth Behind The U.S. Economic Recovery

    Learn how the economy is being artificially propped up by unsustainable monetary and fiscal policies.
RELATED FAQS
  1. How are aggregate demand and GDP related?

    See why aggregate demand and gross domestic product (GDP) are necessarily the same thing according to Keynesian macroeconomic ... Read Answer >>
  2. How can I use the rule of 70 to estimate a country's GDP growth?

    Find out about the rule of 70, what it is used for and how to use it to determine the number of years a country's GDP takes ... Read Answer >>
  3. What is the correlation between money supply and GDP?

    Read about the two-way correlation between the total amount of money circulating in the economy and gross domestic product, ... Read Answer >>
  4. What impact does the balance of trade have on GDP calculations?

    Read about the impact of the balance of trade on a nation's gross domestic product, and why each of these figures can be ... Read Answer >>
  5. What Are the Best Measurements of Economic Growth?

    Learn how economists and statisticians track economic growth and why GDP might not be the best measurement of real economic ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center