Macro - Output Gaps Flashcards
Actual growth rates
Measured by changes in real GDP over time. The growth rate is often very volatile as shown on diagrams.
Long term growth rates
Average sustainable rate of growth over a period of time, also known as the trend rate of growth. The trend of the long run growth tare is determined by changes in the productive capacity of the economy.
What’s the distinction between actual growth rates and long-term trends in growth rates?
Actual growth rates refer to the observed rate of growth in a specific period of time, usually measured in years, for a particular variable such as GDP, population, or productivity.
On the other hand, long-term trends in growth rates refer to the underlying pattern or direction of growth over an extended period, often several decades or more
Positive output gap
if the actual level of real GDP is greater than the maximum potential level of real GDP then there is a positive output gap. Positive output gaps are unsustainable in the long run according to the classical economic model of AS/AD due to the fact that workers will revise up their wages in the long run causing SRAS to decrease and the economy to move back to full employment.
Negative output gaps
The output gap is the difference between the actual level of real GDP and the maximum potential level of real GDP. If the actual level of real GDP is less than the maximum potential level of real GDP there is a negative output gap, meaning there is spare capacity within the economy.
Why are output gaps difficult to measure
It is very difficult to estimate the size of the output gap of an economy, due to the fact that in order to do this you need to estimate the economy’s maximum potential output level. The many different variables that determine the maximum potential output level make this difficult to do e.g. changes in the quantity of labour, the productivity/quality of the workforce, the spare capacity of individual businesses etc.
How do AS/AD diagrams show a output gap
When the actual growth rate is greater than the trend growth rate, there is a positive output gap within the economy. In contrast to this, when the actual growth rate is lower than the trend growth rate, there is a negative output gap within the economy.
