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Abstract
The closely related concepts of potential output and the natural rate of unemployment have important policy implications because they describe long-run equilibria in product and labor markets and are important determinants of wage and price developments in the short run. These are now particularly important policy concerns because unification of the two German economies implies a significant increase in demand in west Germany, a demand stimulus that is already apparent in 1990. In the long run, the path of potential output, and hence productivity at potential output, in west Germany will determine the magnitude of the “catch up” that is required for living standards in east Germany to match those in the western part of the country.2
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