2.5.2: Output gaps

• Long run trend rate of growth: estimated rate of economic growth or real GDP over a period of time
• Actual growth: Actual change in real GDP over time
• Output gap: Difference between Long run trend rate and Actual Growth
• Positive output gap: When Actual growth is higher than predicted long run trend growth
• Negative output gap: When actual growth is lower than long run trend growth
• Output gaps are difficult to measure as real GDP is very hard to estimate
• Output gaps can be shown using AS and AD diagrams. LRAS shows the full capacity output, and SRAS shows the current equilibrium, so you can work out what type of output gap there is