My immigrant parents placed more value on education than sports, so they were quite relieved that I only managed two out of three. Central banks apply “potential” in a similar way—to assess what an entire economy, rather than a single person, can achieve on a sustainable basis. So “potential” can be viewed as a measure of aggregate, or total, supply in an economy.
Essentially, it refers to an economy’s capacity to produce goods and services when all available productive resources—specifically, labour and capital—are used to their fullest. In practice, we pay close attention to the growth rate of potential output as well as to its level. An economy’s productive capacity is normally always growing as available resources and their productivity expand.