Above Full-Employment Equilibrium
An economy operating at a higher than usual real gross domestic product (GDP).
Above Full Employment Equilibrium Details
When an economy runs above its full employment equilibrium, it means the economy produces goods and services above a long-term sustainable rate. The increase in goods and services pushes the prices and wages up because companies are trying to meet the demand. However, resources are not infinite, and eventually, supply cannot always meet demand.
As supplies for products and services start to run low, this puts pressure on the economy that can cause price inflation. Over time the economy will shift back to its proper balance because people will not be willing to pay the higher prices.
Real-World Example of Above Full Employment Equilibrium
During World War II, the U.S. was operating above full employment equilibrium when producing vehicles and weapons for the war. Steel and other precious metals were in such short supply that people began saving and donating every piece of scrap metal they could.
The supply issue became worse as time went on, and the demand only increased. The pace at which the U.S. was producing weapons, jeeps, tanks, etc., was just not sustainable. However, when the war ended, the economy went back to its normal balance.
Above Full Employment Equilibrium vs. Below Full Employment Equilibrium
If an economy is operating below full-employment equilibrium, that means it has way more resources than demand. Some might think this is a good thing because then the economy will not run out, but this can be a bad thing if markets do not take precautions. An economy below full employment equilibrium can lead to a recession if the market does not increase demand for goods and services.
Significance of Above Full Employment Equilibrium
A crucial thing to keep in mind is there is no magic number for a balanced economy. The resources for goods and services are always in flux, and the number of laborers available in an economy constantly changes as well. So this means that the economy is continually changing. What may be the proper balance one month may not be the right balance two or three months down the road, let alone two or three years.
Several different things can cause an economy to go above or below its equilibrium. Sudden increases in demand, government spending, stimulus packages, household consumption, and other factors all go into how an economy goes up or down and can all influence the equilibrium.
There are several different ways to bring an economy above its full employment equilibrium back to balance. A few of those methods are to increase taxes or interest rates, reduce spending, or other monetary policy actions through the central bank; however, policymakers who use these methods must remember two things. The first is that these policies will take a few years to bring things back to normal. The second is not to make too drastic changes because it could backfire and cause a recession instead of bringing things to balance.