Output Gap

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    Output Gap

    • An output gap is the difference between an economy’s actual and potential GDP
    • It is said to exist when an economy is not producing at full capacity

     

    • A positive output gap is where an economy’s actual output exceeds their potential output
      • This is impossible in the long run (by definition), but in the short run, can be achieved by workers working overtime, or machinery being used flat-out.
    • Countries with positive output gaps usually experience inflation.

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