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. Real Gross Domestic Product (GDP)

    Real gross domestic product is an inflation-adjusted measure ...
  2. Recessionary Gap

    A recessionary gap is a macroeconomic term that describes the ...
  3. Competitive Equilibrium

    A competitive equilibrium is when profit-maximizing producers ...
  4. GDP Price Deflator

    The GDP price deflator is a system that converts output measured ...
  5. GDP Gap

    GDP gap is the forfeited output of a country's economy resulting ...
  6. General Equilibrium Theory

    General equilibrium theory studies supply and 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. Investing

    Why GDP Can Grow at 3%: The Skeptics Are Wrong

    Hard data including booming earnings show the economy will pick up steam
  3. Insights

    Why GDP Is Not an Accurate Measure of the Economy

    Is gross domestic product (GDP) an accurate measure of the strength or weakness of the U.S. economy?
  4. 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.
  5. Insights

    The Importance Of Inflation And GDP

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

    China's GDP Examined: A Service-Sector Surge

    China's economy has surged over the last several decades but still has a ways to go to modernize. Here's a look.
  7. Insights

    Deadly Flaws in Major Market Indicators

    These indicators give investors and experts some data to work with, but they're far from perfect.
  8. Taxes

    Countries With The Highest Taxes

    If you thought your taxes as an American were high, think again. Here's a list of the top five countries with the highest tax revenues as a percentage of GDP.
  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. What is GDP and Why Is It So Important To Investors?

    The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. What does ... Read Answer >>
  2. How does the United States government measure economic growth?

    Find out how the Bureau of Labor Statistics and the Bureau of Economic Analysis measure economic growth in the United States ... Read Answer >>
  3. 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 the figures involved in each ... Read Answer >>
  4. Are Social Security payments included in the US GDP calculation?

    Understand how gross domestic product is calculated and whether or not transfer payments such as Social Security are included ... Read Answer >>
  5. What is the difference between a dominant strategy solution and a Nash equilibrium ...

    Dive into game theory and the Nash equilibrium, and learn why the equilibrium assumptions about information are less important ... Read Answer >>
Trading Center