Output Gaps

• The growth of the economy fluctuates over time. What are there fluctuations known as?

  • the trade cycle
  • They are different than the trend rate of economic growth.
• What are fluctuations in economic growth linked to?

  Real growth, whereas the long-term trend rate of growth is linked to the potential growth of the economy.
• How are output gaps created?

  The difference between the long-term trend rate of growth and fluctuations in real GDP creates output gaps.
• When does a negative output occur?

  A negative output gap occurs when actual output in the economy falls below the trend output. This may happen during a recession when the economy is underperforming due to a fall in aggregate demand.
• What are the characteristics of a negative output gap?

  • underutilised resources
  • a high rate of unemployment
  • downward pressure of inflation
  • low business and consumer confidence
• When does a positive output gap occur?

  A positive output gap occurs when actual output is greater than the trend output. A positive output gap may occur during an economic boom period. For a period of time an economy can produce beyond its productive potential when the factors of production are being overused.
• What are the characteristics of a positive output gap?

  • over-utilised resources
  • upward pressure on inflation
  • low rates of unemployment
  • high business and consumer confidence
• What is meant by output?

  The amount of something produced by a person, machine or industry in the economy.

  a.k.a. Total number of goods and services produced by an economy.
• What is output often measured in?

  GDP
• What is meant by hysteresis?

  When past events impact future events in terms of employment. e.g. COVID
• What are the factors influencing output?

  • Unemployment
  • Spare capacity
  • Inflation
  • Labour productivity
• What factors can increase output?

  • decreased unemployment
  • (?) spare capacity
  • decreased inflation
  • increased labour productivity
• What factors can cause decreased output?

  • increased unemployment
  • (?) spare capacity
  • increased inflation
  • decreased labour productivity
• To achieve a positive output gap where must businesses be operating?

  Outside of our PPF
• What factors impact actual GDP?

  • cost of production
  • shifts in AD
• What factors impact potential GDP?

  • change in productive capacity
  • shifts in LRAS
• What are the more specific factors impacting actual GDP?

  • investment - animal spirits
  • inflation
  • supply chain issues
  • bad weather
  • consumption
  • net trade
• What are the more specific factors impacting potential GDP?

  • war, loss of land
  • long term unemployment
  • long term poor weather
  • outward migration
• How does employment and labour force relate?

  If people are employed in the short run, they are still in the labour force and so the quantity of labour remains the same.

  -> So people have to be long-term unemployed e.g. hysteresis, structural unemployment.
• What causes slack (spare capacity) in the economy?

  • Level of unemployment
  • Firms reporting hiring difficulties
  • Wage inflation
  • Capacity utilisation
  • Productivity growth
  • Inflation
• What could a decrease in productivity and efficiency leading to a shift in the PPF (inward) be due to?

  Due to a lack of investment (hysteresis) if over a long period of time.