2.5.2 output gaps

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6 Terms

1
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actual growth rates

  • The actual growth rate is the annual % increase in RGDP.

  • It reflects the econ’s ST performance, influenced by D + S shocks, fiscal + monetary policies + other cyclical factors.

  • Actual growth rates fluctuate more due to ST factors.

  • Actual growth rates can be highly volatile.

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lt trend growth rates

  • The LT trend growth rate is the average rate at which an econ can grow over a sustained period w/o generating inflationary pressures.

  • It’s determined by fundamental factors, eg. tech, labour force growth, capital accumulation + productivity improvements.

  • Trend growth rates indicate LT sustainable growth.

  • Trend growth rates r relatively stable.

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+ve output gaps

  • Occurs when actual GDP exceeds potential GDP.

  • Indicates that the econ is producing above its sustainable capacity, often leading to inflationary pressures.

  • Occurs when the AD curve intersects the AS curve to the right of potential output (Y*).

  • Diagram: Draw AD and AS curves with the intersection to the right of Y*, indicating actual output above potential.

<ul><li><p>Occurs when actual GDP exceeds potential GDP.</p></li><li><p>Indicates that the econ is producing above its sustainable capacity, often leading to inflationary pressures.</p></li></ul><ul><li><p>Occurs when the AD curve intersects the AS curve to the right of potential output (Y*).</p></li><li><p>Diagram: Draw AD and AS curves with the intersection to the right of Y*, indicating actual output above potential.</p></li></ul><p></p>
4
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-ve output gap

  • Occurs when actual GDP is below potential GDP.

  • Indicates underutilisation of resources, high UE + deflationary pressures.

  • Occurs when the AD curve intersects the AS curve to the left of potential output (Y*).

  • Diagram: Draw AD and AS curves with the intersection to the left of Y*, indicating actual output below potential.

<ul><li><p>Occurs when actual GDP is below potential GDP.</p></li><li><p>Indicates underutilisation of resources, high UE + deflationary pressures.</p></li></ul><ul><li><p>Occurs when the AD curve intersects the AS curve to the left of potential output (Y*).</p></li><li><p>Diagram: Draw AD and AS curves with the intersection to the left of Y*, indicating actual output below potential.</p></li></ul><p></p>
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difficulties of measurement

  • Potential GDP isn’t directly observable + must be estimated, leading to potential inaccuracies.

  • Economic data is often revised, which can change the assessment of output gaps.

  • Changes in the economy’s structure, eg. tech advances or demographic shifts, can affect potential GDP estimates.

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use of ad/as diagram to indicate output gaps

  • The AD curve represents the total Q of g/s demanded at diff PLs.

  • The AS curve represents the total Q of g/s that producers r willing + able to S at diff PLs.

  • Potential Output (Y*): The level of output the econ can produce at full employment (LT trend).

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