2.5.2 output gaps

actual growth

% increase in a country's real gdp and it is usually measured annually , caused by increases in ad

long term trend in growth rates

is the long run expansion of the productive potential of an economy, caused by increases in as

potential output of an economy

is what the economy could produce if resources were fully employed

output gap occurs when

there is a difference between the actual level of output and the potential level of output, it is measured as a % of national output

negative output gap

occurs when the actual level of output is less than the potential level of output

negative output gap effect on inflation

puts downward pressure on inflation
usually means there is unemployment of resources in an economy so labour and capital are not used to their full productive potential = there is a lot of spare capacity in economy

positive output gap

occurs when the actual level of output is greater than the potential level of output

positive output gap could be due to

resources being used beyond the normal capacity such as if labour works overtime. if productivity is growing, output gap becomes positive, puts upwards pressure on finlation

countries like china and india

have high rates of inflation due to fast and increasing demand, associated with positive output gap

difficulties with measuring output gaps

- difficult to estimate the trend in a series of data

- strucre of economy often changes which may not alway be accurate

- changes in the exchange rate might offset some inflationary effects of a positive output gap

- data not always reliable e.g from emerging markets