Output Gaps

Question 1

Negative output gap

Answer 1

A negative output gap means that an economy has a large amount of spare productive capacity. When actual GDP is below estimated potential GDP.

Question 2

Output gap

Answer 2

Difference between actual and potential national output. A negative output gap means that an economy has a large amount of spare productive capacity.

Question 3

Positive output gap

Answer 3

A positive output gap means that an economy is working beyond its normal productive capacity, perhaps by workers working overtime and machines running long hours.

Question 4

Trend growth

Answer 4

The long run average growth rate – mainly determined by changes in the stock of available factor inputs and also improvements in productivity. Trend growth is represented by a rightward shift in the LRAS (or PPF boundary).