The percentage increase in a country's real GDP, usually measured annually, caused by increases in AD
Long-term trend in growth rates
The long run expansion of the productive potential of an economy, caused by increases in AS
Potential output
What the economy could produce if resources were fully employed
Output gap
The difference between the actual level of output and the potential level of output, measured as a percentage of national output
Negative output gap
When the actual level of output is less than the potential level of output, putting downward pressure on inflation and indicating unemployment of resources and spare capacity
Positive output gap
When the actual level of output is greater than the potential level of output, putting upward pressure on inflation and indicating resources being used beyond normal capacity
Countries with high inflation due to fast and increasing demand
China
India
Difficulties with measuring the output gap
It is difficult to estimate the trend in a series of data
The structure of the economy often changes, making estimates inaccurate
Changes in the exchange rate might offset some inflationary effects
Data is not always reliable, especially from emerging markets, and extrapolating data from past trends might lead to uncertainties
