What is full-employment GDP?

Full-employment gross domestic product refers to the output of an economy operating at its highest potential and with employment at an ideal level. It represents output in a situation in which an economy is not moving toward a recession or expanding too quickly.

Economic output in such a scenario, as measured by GDP, is high enough to keep prices stable and low enough to ward off inflation. In economics, a state of balance is known as equilibrium. If one factor changes, other factors react. To achieve full-employment GDP, inflation and unemployment must be in a state of equilibrium. Economies tend to be cyclical, with unemployment periodically increasing, businesses adjusting their expectations and the economy moving again toward full employment.