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.
