Output Gap

Output Gap

  • An output gap is the difference between an economy’s actual and potential GDP
  • It is said to exist when an economy is not producing at full capacity

 

  • A positive output gap is where an economy’s actual output exceeds their potential output
    • This is impossible in the long run (by definition), but in the short run, can be achieved by workers working overtime, or machinery being used flat-out.
  • Countries with positive output gaps usually experience inflation.