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An economy’s potential output is defined by the amount and kinds of resources that it has available to it and by the efficiency with which it can use those resources.
Resources can be both human and natural. For example, a country with more educated workers is likely to have a higher potential output than one whose workers are uneducated. The educated workers can do work that is more complex and that adds more value to the things that they produce. This makes the economy’s potential output higher. As an example of natural resources, a country that has large deposits of minerals or rivers suitable for hydropower has advantages over those countries that do not. These things increase the country’s potential.
At the same time, however, efficiency is very important. A country that has a lot of resources will not be able to produce much if it lacks the technology and the types of business organization that will allow those resources to be used.
Resources, and the ability to use them efficiently, are the main factors that define an economy’s potential output.
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