2.5.2 Output gaps

what is the distinction between actual growth rates and long-term trends in growth rates?

• short term vs long term: actual growth rates fluctuate more due to short term factors, while trend growth rates indicate long-term sustainable economic growth.

what is a positive output gap?

• occurs when actual GDP exceeds potential GDP.

• indicates the economy is producing above its sustainable capacity, often leading to inflationary pressures.

what is a negative output gap?

• occurs when actual GDP is below potential GDP.

• indicates underutilization of resources, high unemployment, and deflationary pressures.

what are the difficulties of measurement?

• estimation of potential GDP: potential GDP is not directly observable and must be estimated, leading to inaccuracies.

• structural changes: changes in the economy’s structure, such as technological advancements or demographic shifts, can affect potential GDP estimates.