10. Output Gap

Question 1

What is an output gap?

Answer 1

The output gap is the difference between
the actual level of GDP and its estimated
potential level.
The output gap is usually measured as a
percentage of the level of potential
output.

Question 2

What is an negative output gap

Answer 2

A negative output gap refers to a situation where an economy’s actual
output or real gross domestic product (GDP) is below its potential output.

Potential output represents the level of production an economy can
achieve when all resources (labour, capital, technology) are fully employed
without causing inflationary pressures.

When actual output falls below this potential level, it results in a negative
output gap.

A negative output gap often corresponds to higher unemployment and
under-utilized resources. It might also lead to disinflationary effects.

Question 3

What is a positive output gap?

Answer 3

In economics, a positive output gap refers to a situation where an
economy’s actual output or real gross domestic product (GDP) exceeds its
potential output.

Potential output represents the level of production an economy can
sustainably achieve when all available resources (labour, capital,
technology) are fully utilized without causing inflationary pressures.

When actual output surpasses this potential level, it results in a positive
output gap. This can lead to rising demand-pull and cost-push inflationary
effects.