2.5.2 - Output gap

Question 1

What is a Positive Output Gap ?

Answer 1

● When real GDP is greater than the potential GDP

Question 2

What is a Negative Output Gap ?

Answer 2

● When the real GDP is less than the potential GDP.

- There is spare capacity in the economy to produce more goods/services than are being produced.

Question 3

What is the Distinction between actual growth rates and long-term
trends in growth rates.

Answer 3

● Actual growth rates - The Actual change (i.e, the change in real GDP) over time and its changes are what make up the business cycle.

● Long-term trends in growth rates - This is the average sustainable rate of growth over a period of time, also known as the trend rate of growth. The trend of the long run growth rate is determined by changes in the productive capacity of the economy.

Question 4

Difficulties with measuring the output gap.

Answer 4

• The structure of the economy often changes, which means estimates may not always be accurate. For example, immediately after a recession, the level of spare capacity might fall below the level anticipated, since some workers might become economically inactive, firms might close and some banks might be unwilling to lend.
• Data is not always reliable, especially from emerging markets, and extrapolating data from past trends might lead to uncertainties.