output gap

positive output gap

A positive output gap is where GDP is higher than estimated

Negative output gap

A negative output gap is where GDP is lower than estimated

Output Gaps on AD/AS Diagram

The green triangle demonstrates a positive output gap, as production is taking place beyond the LRAS at P Y

The red triangle demonstrates a negative output gap, as not all factors of production are being utilised at P Y

However, classical theory suggests that output gaps will repair themselves, and change the price level accordingly

Keynesian economists believe that output gaps (positive or negative) can persist for long periods if there is no government intervention to correct them