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.

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