2.5.2 Output Gaps ✅ Flashcards
What is actual growth and long term trend in growth?
Actual growth is just a change in GDP
Long term grand growth is the average growth overtime (trend rate).
What is the difference between actual growth rate and the trend?
Out put gap.
What are output gaps a sign of? Give examples?
Inefficient use of resources. Eg, welfare too generous, unsuitable resources for demand, structure changes.
What is a negative output gap and what are the issues with it?
When real growth in lower than potential.
- higher unemployment.
- factors under-utilised.
- risk of deflation.
What is a positive output gap and what are the problems with it?
Level of acc GDP is higher than potential.
- factors like labour are overused.
- inflation.
Show a positive output gap and negative on the PPF?
Negative is bellow ppf positve is outside it.
Y axis = capitol
X axis = consumer
What two graphs can show a negative output gap?
SR or LR (Keynesian or classical).
What graph will you use to show a positive output gap?
SR and LR (classical).
Give evidence on how output gaps are difficult to measure?
- due to potential level depending on spare capacity surveys on this may be inaccurate.
- inaccurate data on labour force.
- gaps in knowledge on investment (new potential from new capital).
With a negative output gap what does this also show?
There is spare capacity.
Why are output gaps hard to calculate?
- As exact position of LRAS is unknown + GDP calculations not always accurate.
