2.5.2 - Output Gaps

Question 1

Define Output gap

Answer 1

Difference between the actual level of Real GDP and the productive potential output (long run trend line) of the economy

Question 2

Define Negative Output Gap

Answer 2

. When the actual level of Real GDP will be below the trend level of GDP (productive potential)

.When the economy is in recession and there is unemployment and deflation

. There will be a spare capacity in the economy, with factories, officers and workers lying idle, when they could be producing goods

Question 3

Define Positive Output Gap

Answer 3

. When the level of actual real GDP is above the long run trend level of GDP (productive potential)

. This means there is unsustainable economic growth

. There will be a BOOM in the positive output gap

. There will be low unemployment, inflation (demand - pull)

Question 4

Difficulty in measuring output gaps

Answer 4

. It is not possible to measure the productive potential (long run trend line) of an economy because there is no way a producing a monetary figure for the value of variables such as machinery, workers and technology

. It is difficult to estimate the trend in a series of data.

.Data is not always reliable, especially from emerging markets, and extrapolating data
from past trends might lead to uncertainties.