Th2.5: Output Gaps

Question 1

What is an output gap?

Answer 1

the difference between the actual level of GDP and the estimated long-term value for GDP - shown on the trade cycle diagram which demonstrates how the actual GDP is not always on trend

Question 2

What is a positive output gap?

Answer 2

when GDP is higher than estimated

Question 3

What is a negative output gap?

Answer 3

when GDP is lower than estimated

Question 4

What happens with a negative output gap?

Answer 4

there is spare capacity in the economy with factories, offices and workers not being utilised to produce goods and services

Question 5

Why is the output gap very difficult to measure?

Answer 5

the exact position of the LRAS is unknown and also because initial estimates of the real GDP are often inaccurate

Question 6

Why do some economists believe output gaps are so hard to measure?

Answer 6

they are not a valid concept to use from the purpose of economic policy

Question 7

Why is it not possible to measure the productive potential of an economy?

Answer 7

there is no single monetary value for the level of variables such as machinery, workers and technology

Question 8

Why is it not possible to measure the productive potential of an economy?

Answer 8

there is no single monetary value for the level of variables such as machinery, workers and technology