What is Above Full-Employment Equilibrium?
Above full-employment equilibrium occurs when a country's gross domestic product (GDP) is higher than normal.
How Does Above Full-Employment Equilibrium Work?
For example, let's say Country X's normal rate of GDP growth is 2% per year. Over the last two years, however, GDP has grown by 5% a year. The country is experiencing above full-employment equilibrium. The term's reference to employment reflects the fact that the country is producing goods at a higher rate that it normally does when everybody has a job (full employment).
Why Does Above Full-Employment Equilibrium Matter?
Above full-employment equilibrium sounds like a good thing, and it generally is a sign that a country is doing well. However, above full-employment equilibrium can also lead to inflation. That's because the country is running at full capacity and can't produce more goods and services than it already is producing, which can lead to supply shortages, which in turn drive up prices. Accordingly, the condition puts many economists on alert.