Gross Measures - Economic Activity

Question 1

WHAT is Positive GDP gap?

Answer 1

Real GDP < Potential GDP

It means there is inefficiency in the economy and difference b/w Real & Potential GDP measures the extent of those inefficiencies.

Question 2

WHAT is Negative GDP gap?

Answer 2

Real GDP > Potential GDP

This creates UPWARD pressure on prices, resulting in INFLATION (because the economy, the real GDP is overheated in terms of what it would normally be expected to produce at full capacity)