An economy is assumed to be operating at full capacity when its real GDP (what the economy produces) equals its potential GDP (what the economy would produce if all factors of production are used). When the economy is producing at full potential, everyone who wants to work can find a job, because every worker who enters the workforce will produce what he or she will eventually consume with the income. In addition, when the economy is producing at full capacity, unemployment rates in the economy represent the natural rate of unemployment (only frictional and structural unemployment exists), which is also referred to as full employment.

To ensure the economy continues to operate at potential GDP (full capacity where all savings are invested in production functions and where all those who wish to work can find a job and all other factors of production are fully utilized in the production function), governments use fiscal and monetary policies to lower unemployment rates and to control prices (inflation).

GDP measures the total output of a nation and can be a tool to measure recessions and economic growth.

Question: Consider the standard of living versus the quality of living.

• What are some ways that the quality of life can improve that are not captured by GDP?
• What are some alternative ways to measure the quality of life?