Why is P/E included in potential GDP calculation

[difanchen]

Hi guys,
I am getting hela confused about this. Topic referring to “On potential growth”. If anybody can help, much appreciated~~~
Equation: P=GDP(E/GDP)(P/E)
Why is P/E included in there? The text doesn’t speak a word about it.

 

[Revul]

Think about it conceptually rather than literally, and take another look at the equation.
In principle, broad earnings growth cannot outpace GDP growth in the long run. Earnings growth is a driver for price action in the markets. If earnings aren’t outpacing GDP in the long run, market prices aren’t either - they’re loosely tied to GDP growth and oscillate around it.
I hope that helps/makes sense.