2.5.2 Output gaps

Question 1

What is the output gap?

Answer 1

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

Question 2

What is a positive output gap?

Answer 2

I.e. where actual GDP is above potential GDP – this is a sign of possible excess aggregate demand in an economy

Question 3

What is a negative output gap?

Answer 3

i.e. where the economy has large margin of spare capacity of factor resources

Question 4

Why is it difficult to assess the size of an output gap?

Answer 4

This is because it is difficult, amongst other things, to assess:
- Productivity
- The size of the labour force with any accuracy
- Business output and confidence, because surveys are often subjective
- Underemployment

Question 5

What do output gaps look like on an AD/AS diagram?

Answer 5