2.5.2 output gaps

What is the actual growth rate?

The annual percentage increase in real GDP.

What does the actual growth rate reflect?

The economy’s short-term performance influenced by demand and supply shocks, fiscal and monetary policies, and other cyclical factors

Give an example of an actual growth rate.

If a country’s real GDP grows from $1 trillion to $1.05 trillion, the actual growth rate is 5%.

What is the long-term trend growth rate?

The average rate at which an economy can grow over a sustained period without causing inflationary pressures

What determines the long-term trend growth rate?

Fundamental factors such as technology, labor force growth, capital accumulation, and productivity improvements.

Give an example of a long-term trend growth rate.

An economy may have a long-term trend growth rate of 2.5% annually due to steady technological advancement and population growth.

What is the difference between short-term actual growth rates and long-term trend growth rates?

Actual growth rates fluctuate more due to short-term factors, while trend growth rates indicate long-term sustainable growth.

How does volatility differ between actual and trend growth rates?

Actual growth rates can be highly volatile; trend growth rates are relatively stable.

What is a positive output gap?

When actual GDP exceeds potential GDP.

What does a positive output gap indicate?

The economy is producing above its sustainable capacity, often causing inflationary pressures.

Give a real-world example of a positive output gap.

During economic booms like the late 1990s dot-com bubble, the U.S. experienced a positive output gap.

What is a negative output gap?

When actual GDP is below potential GDP.

What does a negative output gap indicate?

Underutilization of resources, high unemployment, and deflationary pressures

: Give a real-world example of a negative output gap.

During the 2008 financial crisis, many economies faced negative output gaps due to reduced demand and high unemployment.

Why is estimating potential GDP difficult?

Potential GDP is not directly observable and must be estimated, leading to potential inaccuracies.

How do data revisions affect output gap measurement?

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

How do structural changes affect potential GDP estimates?

Changes such as technological advances or demographic shifts can impact estimates of potential GDP.

What does the Aggregate Demand (AD) curve represent?

The total quantity of goods and services demanded at different price levels.

What does the Aggregate Supply (AS) curve represent?

The total quantity of goods and services producers are willing and able to supply at different price levels.

What is Potential Output (Y*)?

The level of output the economy can produce at full employment (long-term trend).

When does a positive output gap occur on an AD/AS diagram?

When the AD curve intersects the AS curve to the right of potential output (Y*).

What does it mean if AD intersects AS where actual output (Y) > Y*?

There is a positive output gap, indicating output above sustainable capacity.

When does a negative output gap occur on an AD/AS diagram?

When the AD curve intersects the AS curve to the left of potential output (Y*).

What does it mean if AD intersects AS where actual output (Y) < Y*?

There is a negative output gap, indicating output below sustainable capacity.

What was the output gap situation during the 2008 financial crisis?

A negative output gap as many economies operated below potential output due to reduced spending.

What was the output gap situation in the late 1990s U.S. economy?

A positive output gap with growth beyond sustainable levels due to high demand and technological optimism.