2.5.2 Output gaps

0.0(0)
studied byStudied by 2 people
learnLearn
examPractice Test
spaced repetitionSpaced Repetition
heart puzzleMatch
flashcardsFlashcards
Card Sorting

1/5

encourage image

There's no tags or description

Looks like no tags are added yet.

Study Analytics
Name
Mastery
Learn
Test
Matching
Spaced

No study sessions yet.

6 Terms

1
New cards

ACTUAL GROWTH RATES

  • Actual growth is actual change (i.e. change in real GDP) over time and its changes are what make up the business cycle

2
New cards

LONG TERM TRENDS

  • long run trend rate of growth is average sustainable rate of economic growth over a period of time

3
New cards

OUTPUT GAP

  • diff between actual level of GDP and estimated long-term value for GDP

  • shown on the trade cycle diagram which demonstrates how actual GDP is not always on trend

4
New cards

POSITIVE AND NEGATIVE OUTPUT GAP

  • pos- when GDP is higher than estimated

  • neg- when GDP is lower than estimated

  • w/ a neg output gap, theres spare capacity in economy with factories, offices and workers not being utilised to produce g and s

5
New cards

MEASURING OUTPUT GAP

  • very difficult to measure, bc exact position of LRAS is unknown and initial estimates of real GDP are often inaccurate

  • some believe they’re so difficult to measure that they’re not a valid concept to use from the purpose of economic policy

  • not possible to measure the productive potential of an economy as there is no single monetary value for the level of variables such as machinery, workers and tech

6
New cards

OUTPUT GAP- AD/AS DIAGRAM

  • LRAS shows full capacity output

  • An equilibrium to the right of the LRAS shows the economy working over capacity (pos) in the short term but to the left it shows the economy working under capacity (neg)

  • classical economists would argue that a pos output gap would be filled by long-run EG moving LRAS curve, a recession which would decrease AD or a rise in the costs of production which would decrease SRAS- opposite for neg

<ul><li><p>LRAS shows <mark data-color="red" style="background-color: red; color: inherit">full capacity output</mark></p></li></ul><p></p><ul><li><p>An equilibrium to the right of the LRAS shows the economy working over capacity (<mark data-color="red" style="background-color: red; color: inherit">pos</mark>) in the short term but to the left it shows the economy working under capacity (<mark data-color="red" style="background-color: red; color: inherit">neg</mark>)</p></li></ul><p></p><ul><li><p><mark data-color="red" style="background-color: red; color: inherit">classical</mark> economists would argue that a pos output gap would be filled by long-run EG moving LRAS curve, a recession which would decrease AD or a rise in the costs of production which would decrease SRAS- opposite for neg</p></li></ul>