2.5.2 Output gaps Flashcards
Actual growth rates and long-term trends:
what is the long run trend rate of growth
what is actual growth, what do its changes make up
what is the differene between the two
-the long-run trend rate of growth is the average sustainable rate of economic growth over a period of time
-actual growth refers to the actual change (i.e. the actual change in real GDP) over time and its changes are what make up the business cycle
-the dfference between long run trend rate of growth and actual growth id sn ouptut gap
Output gaps:
what is an output gap, what is it shown on and what does it demonstrate
what is a positive output gap
what is a negative output gap, what does a negative output gap mean
why is it difficult to measure an output gap, what do some economists argue
what does a positive/negative output gap look like on a diagram
what dd cassicicsts argue about how positive outut gaps would be filled
-an output gap is the difference between the actual level of GDP and the estimated long-term value for GDP, it is shown on the trade cycle diagram which demonstrates how the actual GDP is not always on the trend
- a positive output gap is when GDP is higher than estimated
- a negatve output gap is when GDP is lower than estimated, with a negative output gap there is spare capacity within the economy with factories, offices and workers not being utilised to produce goods/services
-the ouput gap s difficult to measure due to the exact position of the LRAS being unknown and the initial estimates of real GDP are inaccurate. Some economists believe that it is so difficult to measure that they are not a valid concept to use from the purpose of economic policy
-it can be shon on the keynesian LRAS with an SRAS curve present too. A positive ouput gap can be seen as AD increases and shifts to the right. A negative ouput gap can be seen as AD decreases and shfts to the left
-classicists argue that this positive output gap will be filled by long run economic growth moving the LRAS curve, a recession which would decrease AD or rise sosts in produciton which would decrease SRAS. They also argued that a negative output gap will be filled by a decrease in costs of production increaseng SRAS or rising AD.
