Output gap
Actual real GDP minus potential real GDP.
Output gaps
Key definitions
Negative output gap
Actual below potential — spare capacity.
Positive output gap
Actual above potential — overheating.
Spare capacity
Unemployed resources below Yfe.
Overheating
Economy beyond sustainable capacity.
Deflationary spiral
Falling AD → unemployment → lower C.
Wage inflation
Tight labour market pushes wages up.
Classical view
Negative gap only temporary.
Estimation difficulty
Potential GDP is unobservable.
Policy implication
Negative gap → expansionary policy may help.
Key concepts
Link to inflationary/recessionary gaps on AD/AS.
USA 2009 — negative gap example.
Relevant tips
- Diagram backlog: positive and negative output gaps.
- Evaluate data reliability for gap estimates.