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Output Gap
Output Gap
 The
output gap is the difference between
the actual level of national output and its
potential level and is usually expressed as
a percentage of the level of potential
output
 Negative
deflation.
 If
output gap – Low inflation or
actual GDP is less than potential GDP
there is a negative output gap. Some
factor resources such as labour and
capital machinery are under-utilized and
the main problem is likely to be higher
than average unemployment.
A
rising number of people out of work
indicate an excess supply of labour,
which causes pressure on real wage rates.
 Real
wages are likely to decrease when
there is high unemployment.
 Positive
inflation
•
output gap – upward pressure on
If actual GDP is greater than potential
GDP then there is a positive output gap.
 • Some resources including labour are
likely to be working beyond their normal
capacity e.g. making extra use of shift
work and overtime
•
The main problem is likely to be an
acceleration of demand-pull and costpush inflation.
 • A positive output gap is associated with
countries where an economy is overheating because of fast and rising
demand - a good example of this might
be countries such as India and China
What Determines Size of
Output Gap?
 1.Level
of unemployment. Higher
unemployment increases the negative
output gap.
 2.Levels of spare capacity. If firms report
they are under-utilising capacity, there is
a bigger negative output gap.
What determines the size of
the output gap?
 3.Productivity
growth. If productivity
growth falls, this decreases the growth of
potential ouptut and therefore limits the
negative output gap.
 4.Inflation. Inflation can be a guide to the
output gap. If inflation is high and firms
pushing up prices, this suggests there is a
positive output gap.