What is the Output Gap?
- The output gap is the difference between actual output and potential output.
How Do I Remember It?
- Think of the output gap as a “gap” between what an economy is producing and what it could potentially produce. It’s like a measure of how efficiently an economy is using its resources to produce goods and services.
Real World Example
- For example, if the actual output of an economy is below its potential output, there is a negative output gap, indicating that the economy is operating below its full capacity. This could be due to factors like high unemployment or underutilized resources. On the other hand, if actual output exceeds potential output, there is a positive output gap, suggesting that the economy is overheating and could lead to inflationary pressures.
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By: Ryan Aquino
