<p>Natural level of output is equivalent to full employment output. This does not mean full employment of all resources, there is always a natural level of unemployment even in full employment output level. </p>

<p>Neoclassical economics: Steady state output is achieved when capital-labour ratio is stable or constant. In steady state, economy is not growing and also not in recession, all variales grow at the same rate i.e. birth rates equal death rates, capital accumulation rates equal depreciation rates, etc.</p>

CC BY-SA 4.0
2019-04-02T20:46:37.057Z
2019-04-02T20:46:37.057Z
london
<p>I am reading <strong>Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications</strong> by Gali.</p>

<p>In this question I am going to use the output <span class="math-container">$Y_t$</span> as an example. I am going to use the notation from Gali.</p>

<ul>
<li><span class="math-container">$y$</span> is notation for the <em>steady state</em>. </li>
<li><span class="math-container">$y_t^n$</span> is notation for the <em>the natural level</em> of output.</li>
<li><span class="math-container">$\tilde{y}_t = y_t-y_t^n$</span> is the <em>output gap</em>: deviation from the natural level.</li>
<li><span class="math-container">$\hat{y}_t = y_t-y$</span> is the deviation from steady state.</li>
</ul>

<p>My question is: <strong>Intuitively speaking, what is the difference between <em>steady state level</em> and <em>natural level</em>?</strong> </p>

<p>Note: <span class="math-container">$y_t = \log Y_t$</span> </p>

<macroeconomics><new-keynesian-economics>
How to interpret the difference between natural level and steady state in Macroeconomic theory
Sanjay
# How to interpret the difference between natural level and steady state in Macroeconomic theory

(Asked by: username_0 on 2019-04-02)

I am reading **Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications** by Gali.

In this question I am going to use the output $Y\_t$ as an example. I am going to use the notation from Gali.

* $y$ is notation for the *steady state*.
* $y\_t^n$ is notation for the *the natural level* of output.
* $\tilde{y}\_t = y\_t-y\_t^n$ is the *output gap*: deviation from the natural level.
* $\hat{y}\_t = y\_t-y$ is the deviation from steady state.

My question is: **Intuitively speaking, what is the difference between *steady state level* and *natural level*?**

Note: $y\_t = \log Y\_t$

**Tags:** macroeconomics, new-keynesian-economics


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## 1 answers

### Answer by username_1 on 2019-04-02. Score: 2 | Accepted answer

Natural level of output is equivalent to full employment output. This does not mean full employment of all resources, there is always a natural level of unemployment even in full employment output level.

Neoclassical economics: Steady state output is achieved when capital-labour ratio is stable or constant. In steady state, economy is not growing and also not in recession, all variales grow at the same rate i.e. birth rates equal death rates, capital accumulation rates equal depreciation rates, etc.


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