Output Gaps

• what is an output gap

  the difference between actual and potential GDP
• what is a negative output gap

  The level of actual output in the economy is lower than the trend output level
• how can a negative output gap be shown on the business cycle?

  when there is a recession and actual GDP is below the potential trend GDP

  
• what dos having a negative output gap mean?

  the economy isn't using its resources efficiently
• what can be the results of a negative out put gap?

  - unemployment

  - vacant factories
• what is a positive output gap?

  the level of actual output in the economy is greater than the trend output level
• how can a positive output gap be shown on the business cycle?

  when the economy is in recovery/the actual GDP is above the trend rate

  
• what does having a positive output gap mean?

  the economy is producing above its potential - resources are being overused
• what might a positive output gap look like in the economy?

  - overtime for workers

  - overusing machines
• what is the disadvantage of a positive output gap?

  not sustainable in the LR as workers cannot work overtime forever and machinery can't constantly be overused as it could break
• how can a negative output gap be shown on a neoclassical AD/AS diagram

  when the economy is not at full employment

  
• how can a positive output gap be shown on a neoclassical AD/AS diagram

  when the economy is overusing resources - beyond Yfe

  
• how can a negative output gap be shown on a Keynesian AD/AS diagram

  AD below Yfe

  
• what is the difference between using the neoclassical diagram and the Keynesian to illustrate output gaps?

  Neoclassical diagram shows that there cannot be an output gap in the LR whereas on the Keynesian diagram it shows you can
• Why can't you have a positive output gap in the LR?

  real GDP can't increase past Yfe. An increase in the productive potential will be required to reach that level