2.5.2 Output Gaps Flashcards
What is the Distinction Between Actual Growth Rates and Long-Term Trends?
Actual Growth Rate:
The actual growth rate is the annual percentage increase in real GDP.
It reflects the economy’s short-term performance, influenced by demand and supply shocks, fiscal and monetary policies, and other cyclical factors.
Example: If a country’s real GDP grows from $1 trillion to $1.05 trillion, the actual growth rate is 5%.
Long-Term Trend Growth Rate:
The long-term trend growth rate is the average rate at which an economy can grow over a sustained period without generating inflationary pressures.
It is determined by fundamental factors such as technology, labor force growth, capital accumulation, and productivity improvements.
Example: An economy may have a long-term trend growth rate of 2.5% annually due to steady technological advancement and population growth.
Key Differences:
Short-Term vs. Long-Term: Actual growth rates fluctuate more due to short-term factors, while trend growth rates indicate long-term sustainable growth.
Volatility: Actual growth rates can be highly volatile, whereas trend growth rates are relatively stable.
What is a positive vs negative output gap?
Positive Output Gap:
Occurs when actual GDP exceeds potential GDP.
Indicates that the economy is producing above its sustainable capacity, often leading to inflationary pressures.
Example: During economic booms, such as the late 1990s dot-com bubble, the U.S. experienced a positive output gap.
Negative Output Gap:
Occurs when actual GDP is below potential GDP.
Indicates underutilization of resources, high unemployment, and deflationary pressures.
Example: During the 2008 financial crisis, many economies faced negative output gaps due to reduced demand and high unemployment.
Why is it difficult to measure output gaps?
Estimation of Potential GDP: Potential GDP is not directly observable and must be estimated, leading to potential inaccuracies.
Data Revisions: Economic data is often revised, which can change the assessment of output gaps.
Structural Changes: Changes in the economy’s structure, such as technological advances or demographic shifts, can affect potential GDP estimates.
