Q:

What is equilibrium GDP?

A:

Quick Answer

Equilibrium GDP occurs when the output level, which is the total amount of goods and services produced, is exactly equal to the total amount of goods and services purchased. It is the level of GDP where aggregate supply and aggregate demand are equal.

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Full Answer

Aggregate demand is the total amount of goods and services that consumers are able and willing to purchase. Graphically, aggregate demand is shown using a downsloping curve, where demand is low at high price points and high at low price points. Aggregate supply is the total amount of goods and services produced within in a specific country within a year. This is shown graphically using an upsloping line, where the GDP and prices increase proportionally to one another. Graphically, equilibrium GDP is found at the point where the aggregate demand and aggregate supply curves intersect.

In a closed private economy, equilibrium GDP can be found using the solution to this equation: Y = C + Ig = a + bY + Ig, where Y represents the GDP, C + Ig represents the amount purchased, a is autonomous consumption and b is the marginal propensity. Therefore, the relationship between consumption and disposable income, or DI, is still applicable to the GDP and can be represented as C = a + bDI = a + bGDP.

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