<P> In economics, potential output (also referred to as "natural gross domestic product") refers to the highest level of real gross domestic product (output) that can be sustained over the long term . The existence of a limit is due to natural and institutional constraints . If actual GDP rises and stays above potential output, then (in the absence of wage and price controls) inflation tends to increase as demand for factors of production exceeds supply . This is because of the limited supply of workers and their time, capital equipment, and natural resources, along with the limits of our technology and our management skills . Graphically, the expansion of output beyond the natural limit can be seen as a shift of production volume above the optimum quantity on the average cost curve . Likewise, if GDP is below natural GDP, inflation will decelerate as suppliers lower prices to fill their excess production capacity . </P> <P> Potential output in macroeconomics corresponds to one point on the production possibilities frontier (or curve) for a society as a whole, reflecting natural, technological, and institutional constraints . </P> <P> Potential output has also been called the "natural gross domestic product ." If the economy is at potential, the unemployment rate equals the NAIRU or the "natural rate of unemployment ." There is great disagreement among economists as to what these rates actually are . </P>

Potential output is the level of aggregate output that can be sustained in the long run without