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Full employment level of national income

This is a really important concept

National Income (Y) can be calculated by measuring the total level of output of the economy (GDP etc).

Generally speaking, the more the economy produces, the more people (Labour) will be needed to produce extra goods and services. However, there will be a maximum level of output where everyone (and land and capital) available is employed and no more output can be produced. You can think of this as the economy being at its full capacity - all factors of production being used efficiently.

This level of output is called the full employment level of national income. At this level of income, there is no shortage of demand in the economy and therefore there is no Cyclical Unemployment - but there may still be Structural and Frictional Unemployment.

NB This level of GDP is also referred to as - the Natural Rate of Unemployment by neoclassicists and Non Accelerating Inflation, Rate of Unemployment (NAIRU) by Keynesians.

You can see the level of full employment income in Figure 1 below - Yfe. It is the reason why the Keynesian LRAS has a vertical section and is the level opf GDP that positions the neoclassical LRAS.


Figure 1 Full employment national income (Yfe) - Keynesian and Neo-classical