Explain the concept of potential GDP as an economic indicator.

Potential GDP refers to the maximum level of output that an economy can sustainably produce over a period of time, given its available resources and technology. It represents the level of production that can be achieved when all resources are fully utilized, including labor, capital, and technology, without causing inflationary pressures.

As an economic indicator, potential GDP serves as a benchmark for measuring the economy's long-term growth potential. It helps policymakers and economists assess whether the actual level of output is above or below its potential, indicating whether the economy is operating at full capacity or experiencing a recessionary or expansionary phase.

By comparing actual GDP to potential GDP, policymakers can identify the output gap, which is the difference between the two. A positive output gap suggests that the economy is operating above its potential, indicating inflationary pressures and the need for contractionary monetary or fiscal policies. Conversely, a negative output gap indicates that the economy is operating below its potential, signaling a recessionary phase and the need for expansionary policies to stimulate economic growth.

Overall, potential GDP provides valuable insights into an economy's productive capacity and helps guide policymakers in making informed decisions to maintain stable economic growth and manage inflationary pressures.