How negative and positive output gaps relate to unemployment and inflationary pressures
An output gap measures how far an economy's actual output sits above or below its full potential. A negative gap signals high unemployment. A positive gap signals rising inflation.
Formula
Output Gap = Actual Output − Potential Output
Real World
During the 2009 UK recession, GDP fell roughly 6% below potential, creating a large negative output gap — unemployment peaked at 8.5% while inflation stayed subdued.
Exam Focus
Always state the direction of the gap and link it explicitly to either unemployment or inflationary pressure — examiners penalise vague answers.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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