Output gaps

Potential Output (YFE)

The level of output an economy can produce sustainably into the long run​

Output Gaps

the difference between the actual level of national output (Y) and the potential level of output when all resources are fully employed (YFE)​

Negative output gap

actual GDP < potential GDP​

Positive output gap

actual GDP > potential GDP

Short run Output Gaps

the difference between actual output, Y, at SR equilibrium and potential output, YFE ​

Key Question: How can there be a positive output gap?​

Potential output shows how much an economy can produce sustainably into the long run​
It is therefore temporarily possible to produce above YFE, if we overwork our resources beyond their sustainable level​

Long run Output Gaps

the difference between actual output, Y, at LR equilibrium and potential output, YFE ​