2.5.2 Output gaps

actual growth rates

fluctuates with real gdp, doesn’t match the trend rate, output gaps

long-term trend in growth rates

average rate of economic growth over a period of time, of both booms and slumps, rises smoothly rather than fluctuating, sustainable level

negative output gap

when actual output is below trend output(below maximum potential output), the economy is not functioning at maximum potential output, unemployment is present

there is spare capacity in the economy

positive output gap

when actual output is above trend output (maximum potential output), the economy is not is functioning above maximum potential output, unsustainably

why difficult to measure output gaps

it is very hard to measure the productive potential of an economy as there is no single monetary value for variable such as labour, machinery and technology