2.5.2 Output gaps

Question 1

What is long-term growth?

Answer 1

A long-term growth trend is the underlying trend rate of economic growth over a longer period of time.

Question 2

What is an output gap?

Answer 2

An output gap is the difference between the actual level of output (real GDP) and the maximum potential level of output.

Question 3

What is a positive output gap?

Answer 3

A positive output gap occurs when real GDP is greater than the potential real GDP.

Question 4

What is a negative output gap?

Answer 4

A negative output gap occurs when the real GDP is less than the potential real GDP. There is spare capacity in the economy to produce more goods/services than are being produced.

Question 5

Why is it difficult to measure output gaps accurately?

Answer 5

/This is because it is hard to know exactly what the maximum productive potential of an economy is
/Rapidly rising prices can indicate a positive gap is developing
/Rising unemployment and slowdown in economic growth can indicate that a negative gap is increasing