Potential output refers to what the economy is capable of producing at full employment capacity. actual output refers to what is being produced. if actual output is below potential output, then output can be increased without undue strain on wages, etc. once you exceed potential output, its more difficult to increase activity without straining your resources. Think of it as a running race. If your average capability (i.e., potential) is to run at 10 k/hr and you are running at only 5 k/hr (i.e., actual), you arent straining your resources. in fact you can increase your speed a bit without putting too much extra pressure on yourself. but if you try to exceed 10 k/hr for a sustained period, you are straining your resources considerably.