Full Employment Equilibrium - Explained

What is the Above Full Employment Equilibrium?

Updated at March 28th, 2023

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What is the Above Full-Employment Equilibrium?

When an economy manufactures goods or products at higher economic rates than normal, it is regarded as above full-employment equilibrium. The gross domestic product (GDP) of an economy often reflects the normal rate at which goods or commodities are expected to be produced in an economy. When the rates of production however shoots higher than the appropriate rate measured by the GDP, there is an above full-employment equilibrium. Above full-employment equilibrium is also an indication that the real GDP of an economy is more than what have been recorded in previous years. When the real GDP is more than long-term potential, it might be as a result of inflation experienced in the economy.

What is Below Full Employment Equilibrium?

The Below full employment equilibrium is a term in economic analysis that shows that the output of the short-run gross domestic product (GDP) of an economy is lower than the expected long-term GDP of the same economy. This means that the current GDP is lower than the potential real GDP. The gap between these two GDPs is an indicator of a recessionary period in the economy. The below full-employment equilibrium is used in macroeconomics to depict a situation in an economy where economic inputs are giving less than the expected level of employment that could have been achieved.

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When is the Job Market Above the Full-Employment Equilibrium?

Usually, if an economy or market is in equilibrium, excess short-term supply will not occur, but an above full-employment equilibrium is one that witnesses the production of goods or commodities at higher levels. When a market or an economy is overly vulnerable, higher prices, higher wages and increased production will occur. This will however trigger inflationary pressures. The definition of above full-employment takes the GDP of a nation into consideration. This term refers to a situation in which products and services are produced at higher rate (more than the long-term average). The difference between the current real GDP and the long-term historical average can be as a result of inflation pressures and differences. However, when the rise in prices restores demand to its normal rate, equilibrium will occur. An economy can recover from a state of above full-employment equilibrium given certain factors and measures. The policy of fiscal expansion is one of the significant ways the government can overcome the cause of above full-employment equilibrium. Where there is a notable change in demand such as increase in public spending, increase in military spending, tax cuts, government incentives, among others can help an economy overcome the state of above full-employment equilibrium. These measures would help stimulate demand in an economy.

A Little More on What is Below Full Employment Equilibrium

Below full employment equilibrium is realized when an economy is below its long-term potential real GDP level, the gap between the current GDP and potential GDP would also lead o a gap in the employment level in the economy. When there is a gap in the employment level, it means the economy is tilted towards a recession. A full employment equilibrium means an economy is adequately using all its input resources such as labor, capital, land, real estate, and others. While a below employment equilibrium means input resources are not utilized to the fullest potential in an economy.

Related Topics

Cyclical Unemployment

above full employment employment equilibrium below full employment

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