2.5.2 - output gaps Flashcards
What is the difference between actual and long-term trends in growth rates?
Actual growth is the percentage increase in a country’s real GDP, measured annually, caused by increases in AD.
The long-term trend in growth rates is the long-run expansion of the productive potential of an economy, caused by increases in AS.
What is an output gap?
Occurs when there is a difference between the actual level of output and potential level of output.
What is a negative output gap?
Occurs when the actual level of output is less than potential level of output. There is downward pressure on inflation. There is unemployment of resources within the economy, so FOPs aren’t used to their full productive potential, there is spare capacity.
What is a positive output gap?
Occurs when the actual level of output is greater than the potential level of output. This may be due to resources being used beyond the normal capacity eg. if labour works overtime. If productivity is growing, output gap becomes positive, putting upward pressure on inflation.
What are some difficulties with measuring the output gap?
It is difficult to estimate the trend in a series of data. The structure of the economy often changes so estimates may not be accurate. Changes in the exchange rate may offset some inflationary pressures associated with a positive output gap. Data is not always reliable from emerging markets, extrapolating data from past trends may lead to uncertainty.
