Output Gaps

• Output gap - The difference between the actual level of output and its estimated potential level.
• Positive output gap - Exists in a boom with full employment, high demand and inflation. The actual output is above the trend.
• Negative Output Gap - Exists in a recession with high unemployment and deflation. The actual output is below the trend.
• Problems with measuring output gaps:

  1. Inaccurate data on labour force - measuring migration
  2. Measuring productivity
  3. Surveys of spare capacity may be inaccurate
  4. Difficult to measure underemployment.