Output Gaps Flashcards
What is a negative output gap?
Negative output gap: actual GDP is below potential GDP.
This means that there is
spare capacity in the economy.
Some resources are not fully employed. We would expect some unemployment.
There is not enough demand in the economy for all
resources to be fully utilised.
What is a positive output gap?
Positive output gap: actual GDP is above potential GDP.
This puts resources in the
economy under strain. Demand growth exceeds supply growth.
Firms may find it hard to recruit workers with the right skills and they may find they have to compete
for other resources, such as raw materials, that are in short supply.
This puts upwards pressure on wages and other costs and may lead to inflation.
Consumers may buy more imports if domestic suppliers cannot meet their demand, increasing the trade deficit
What effect does a positive output gap have on resources?
A positive output increases the competition for scarce resources;
wages and other business costs start to rise
*SRAS will shift left
until the economy returns to Yfe. (Cost-push inflation)
What is sustainable growth?
Growth which can continue into the long run
• Growth without using up non-replaceable resources
• No natural resources depletion or degradation (environmentally-friendly)
• Growth which does not compromise future generations
What is inclusive growth?
Growth where all citizens experience an increase in their income/living standard
Why is measuring the output gap difficult?
It involves determining potential output, which is not directly observable
• It is influenced by evolving factors like technological changes and demographic shifts
• Economic uncertainty means it is hard to make precise measurements
