Output Gaps
Economics: Edexcel A A Level, topic 3.5.2
Output Gaps
An output gap is present when there is a difference between the actual level of real GDP in an economy and the potential level of real GDP (when all factors of production are fully employed).
Negative output gap
- A negative output gap is defined as: “when the actual level of real GDP is less than the potential underlying level of real GDP”.
- Negative output gaps means there is 'spare capacity'. So there will be unemployment (demand-deficient), and demand-pull inflationary pressure will be low because there are lots of resources and factors of production not being used.
Positive output gap
- A positive output gap is defined as: “when the actual level of real GDP is greater than the potential underlying level of real GDP”.
- Positive output gaps mean that an economy is temporarily producing beyond its productive potential. This is only possible for a short time, and leads to workers being paid overtime, and workers and machines being over-used. This causes inflationary pressure as wages and costs rise.
Test yourself on Output Gaps
What are the features of a positive output gap?
Which of the following is a feature of a negative output gap?
What is the long term impact of a positive output gap following the rise of wages and costs?