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Suppose that the current estimate of the gap between potential GDP and actual GDP is positive (Pot. GDP exceeds Actual GDP).
Keynes would, in this case, argue that a positive gap means that there are individuals who want to work but have not found a job. Keynes would argue that this unemployment represents inequities in the distribution of income that can be reduced by government policies stimulating the economy.
Suppose that such policies would stimulate activities with a disproportionate effect on deforestation and increases in CO2.
Would you advocate such policies even though they contribute meaningfully to climate change? Or, would you argue for a different measure of potential GDP that excluded activities that contributing meaningfully to climate change – something like, Green Potential GDP? In other words, that climate considerations are more important than inequities in the distribution of income?
Word limit: 300 words.
Suggested Readings:
https://www.brookings.edu/blog/up-front/2022/02/23/how-does-the-fed-define-maximum-employment/ Links to an external site.
https://www.nber.org/papers/w30332 Links to an external site.
https://www.imf.org/en/Publications/fandd/issues/2021/09/how-to-drive-deep-decarbonization-stock Links to an external site.
https://www.imf.org/en/Publications/fandd/issues/2021/09/isabel-schnabel-ECB-climate-change#:~:text=Second%2C%20climate%20change%20could%20further,rates%20of%20morbidity%20and%20mortality Links to an external site..
International Monetary Fund | October 2020, Chapter 3, World Economic Outlook
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